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The Economic Substance or ESR requires UAE onshore and free zone companies and certain other business forms to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (“Economic Substance Test”).
The regulation applies to financial years commencing on or from 1 January 2019. Entities that are within the scope of the Regulations are required to submit an annual Notification form to their Regulatory Authority, and complete and submit to the same Regulatory Authority an Economic Substance Report within 12 months from the end of their financial year.
Following the introduction of Economic Substance Regulations in the UAE and the Specific Guidance on those regulations (Ministerial Decision 215 of 2019) issued by the UAE Ministry of Finance, the EU is set to remove the UAE from a list of non-cooperative tax jurisdictions.
In 2019, the European Union (EU) Code of Conduct Group, responsible for business taxation and assessing the tax measures for all its member states, investigated the tax policies of jurisdictions with no tax or nominal tax. As a result, the EU published a list of non-cooperative tax jurisdictions, which includes the UAE.
The UAE joined Organization for Economic Co-operation and Development (OECD), Base Erosion and Profit Shifting (BEPS) Inclusive Framework in May 2018, through which the UAE was committed to implementing the minimum standards of BEPS Inclusive Framework. In response to this, the UAE published its Economic Substance (ES) Regulations through Cabinet Decision No. 31/2019 on 30 April 2019.
The Economic Substance Regulations primarily apply to any entity (Mainland or Free Zones) within the UAE that undertakes “Relevant Activities”. These Relevant Activities are as follows:
An entity carrying out Relevant Activities must comply with the Economic Substance or ES requirements. However, entities that are directly or indirectly owned by the UAE government (federal and local) are outside the scope of ES.
Of these nine relevant activities listed under the Economic Substance Regulations. Learn more about four key business activities in particular
In order to meet the ES requirements in relation to Relevant Activities, the entity must satisfy the following:
An entity may outsource its CIGA within the UAE, provided the entity retains full control and demonstrates adequate supervision over those activities and outsourced activities are carried out inside the UAE.
Entities that fall within the ambit of the new Regulations will be required to prepare and submit a report to the Regulatory Authority (License issuing Authority) not later than 12 months after the end of the entity’s financial year. The Regulatory Authority will then submit the report to the competent authority, the UAE Ministry of Finance.
UPDATE: Have you filed your ESR Notification this year?
The report shall include the following information in respect of Relevant Activity:
Non-compliance can result in administrative penalties for failure to meet the economic substance test. The penalty is up to AED 50,000 in the first financial period and up to AED 400,000 in subsequent financial periods. The administrative penalties for failure to provide information is up to AED 50,000.
The regulatory authorities are responsible for monitoring compliance with the Notification and reporting obligations under the Regulations, identifying possible Licensees, validating information submitted, determining whether a relevant entity meets the requirements to be treated as exempt, and sharing information with the UAE Federal Tax Authority and the UAE Ministry of Finance.
A licensee is required to submit a notification, in the form and manner specified by the Regulatory Authority, before the deadline, which is 6 months from the end of the respective financial year. The Regulatory Authorities have specified the deadline for their respective jurisdiction. A licensee is also required to submit an Annual Report within 12 months from the end of the respective financial year.
All entities operating in the UAE should assess their activities in the light of new ES Regulations and ensure compliance with the Regulations and the reporting requirements on a timely basis.
The introduction of the new Economic Substance Regulations is a milestone for the UAE’s tax policy towards its alignment with the global Organization for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) directives. It demonstrates UAE’s commitment to curtailing international tax avoidance strategies that exploit the gaps and mismatches in the tax laws globally.
Download the full document of the ES Regulation issued by the UAE Ministry of Finance: Download PDF
For more information on Economic Substance Regulation in UAE: Go to the Ministry of Finance's official ESR Page
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Find out the key requirements for a Licensee to submit Economic Substance Regulation in UAE
Learn how the Economic Substance Regulations in UAE came into effect, the purpose, applicability & impact on your business.