HOW AND WHEN WERE ECONOMIC SUBSTANCE REGULATIONS INTRODUCED IN UAE?
United Arab Emirates (UAE) was included to the European Union’s list of non-cooperative tax jurisdictions as a consequence of concerns from the European Commission. As a result, the UAE issued Economic Substance Regulations (ESR) by Cabinet Decision No. 57 of 2020, which became operative on January 1, 2019.
ESR inadvertently imposes the requirement that all UAE organizations (including offshore businesses and branches of domestic and foreign corporations) who engage in and generate money from any Relevant Activities maintain economic substance in the UAE that is unique to each Relevant Activity. Relevant businesses in UAE must comply with annual filing obligations to avoid penalties for non-compliance.
WHAT IS AN INTELLECTUAL PROPERTY IN UAE?
Assets with no physical form are intellectual properties. They are bound by the law and guarded against any unauthorized usage by third parties. In terms of intellectual property rights, an intangible asset is accorded the same weight as a tangible asset like a piece of real estate. It is equally appropriate to legally safeguard individuals’ intellectual property in order to inspire more people to develop innovative and practical ideas that will benefit society and its citizens.
There are generally three categories of intellectual property in UAE, which are:
WHAT IS A TRADEMARK?
A trademark is an intangible asset that is distinct from names, words, logos, signatures, seals, hallmarks, etc., according to Federal Law No. 37 of 1992 in UAE. Trademarks aid in distinguishing a particular owner’s goods or services from competitor’s goods or services that are similarly in nature. Any UAE citizen or foreigner who resides in the UAE or another nation may submit an application for a trademark. Applications for trademark requests are submitted electronically through the E-service portal. A trademark owner must submit an application to the Ministry of Economy for trademark registration.
WHAT IS A PATENT?
Law No. 17 of 2002 and Federal Law No. 31 of 2016 both protect and regulate patents’ industrial property. Original innovations, innovative ideas, drawings, and designs are all protected by patents in the UAE. These discoveries and concepts must have a scientific foundation and be implementable in the industrial world. Patents are registered through the Ministry of Economy’s International Centre for Patent Registration (ICPR).
WHAT ARE COPYRIGHTS?
A copyright is an intellectual work that is original in the fields of literature, science, and other fields, such as books, creative content, computer codes/programs, art forms, and tangible objects like statues and music, according to UAE Federal Law. For an application to be considered for copyright intellectual property legal rights in the UAE, an electronic application must be submitted via the Ministry of Economy’s website. In the United Arab Emirates, copyright work has 50 years of intellectual property rights. The economic rights for, on the other hand, expire 25 years after the first day of the calendar year.
WHAT ARE ECONOMIC SUBSTANCE REGULATIONS ON INTELLECTUAL PROPERTIES?
A corporation must exhibit pertinent activity in order to prove that it is subject to ESR filing. A franchise is a nice example of this. By borrowing intellectual property from the owner and exploiting it to produce income, many investors make notable profits. The company is responsible for ESR filing once it demonstrates sufficient workforce and IPHC company scope. When corporations join with other overseas companies for IP rights, their intellectual property ESR test is raised.
WHAT IS ESR TESTING?
Companies in the UAE who have received revenue from any relevant activities must show sufficient substance in UAE meeting a few requirements pertaining to such activities. The three ESR Tests (Economic Substance Regulations Tests) listed below:
- Core Income Generating Activity (GIGA) Exam
In this test, primary tasks are carried out in the UAE.
- Managed and Directed Test
This requires the company to be controlled and handled in regard to from the UAE.
- Adequacy Test
This test requires sufficient resources in the UAE such as labor, costs and assets.
While high risk intellectual property enterprises are subject to heightened ESR Tests, holding companies are subject to lower ESR Tests.
HOW TO DETERMINE IF A BUSINESS HAS A HIGH RISK INTELLECTUAL PROPERTY UNDER THE ESR?
High-Risk Intellectual Property license holders receive royalties from the foreign parent company’s Intellectual Property usage. However, Intellectual Property firms in the UAE do not adhere to the fundamental ESR standards, and the parent firm uses these franchises or subsidiary firms as a means of tax avoidance.
Increased ESR testing is necessary for businesses that use royalties in the UAE. You can only define the structure of your firm with the assistance of expert accountants and chartered accountants. For businesses that use franchisees, the license can get in touch with ESR advisors in the UAE to find out if they come under the high-risk ESR category. Economic Substance Regulations have a competent team of UAE’s best ESR consultants, Chartered Accountants and Legal Advisors to guide businesses thoroughly on ESR Testing and other details.