Economic Substance Regulations

All UAE Businesses Must Comply with Economic Substance Regulations

Understanding the UAE Economic Substance Regulations

On 30 April 2019, the UAE Cabinet issued the Cabinet of Ministers Resolution No. 31 of 2019 (concerning economic substance regulations in the UAE, the “ESR”), requiring all in-scope companies and other persons licensed by a UAE onshore or free zone authority (“Licensee(s)”) that carry out relevant activities to have demonstrable economic substance in the UAE for financial years commencing on or after 1 January 2019.

The regulations were amended and replaced on 10 August 2020 by Cabinet of Ministers Resolution No. 57 for the year 2020.

The introduction of ESR brings the UAE in line with other jurisdictions that have recently issued economic substance legislation and affirms the UAE’s commitment to addressing concerns around the shifting of profits derived from certain mobile business activities to “no or nominal tax jurisdictions” without corresponding local economic activities.

Obligations under the ESR

ESR requires businesses engaged in "Relevant Activities" such as banking, insurance, investment fund management, lease-finance, headquarters business, shipping, holding company, intellectual property and distribution and service centre business to demonstrate sufficient economic substance in the UAE.

This is an annual requirement and businesses must file an ESR notification within six (6) months of the relevant financial year end, regardless of whether or not they are engaged in any Relevant Activities.

It is important to undertake an ESR analysis each financial year, as incorrect or false information provided in the ESR notification or ESR report, or incorrectly claiming an exemption from the Economic Substance Regulations, can result in the Licensee being deemed to have failed the economic substance test for the relevant reportable period.

Why the importance?

Fines and penalties: Failure to file an ESR notification or a ESR report, or claiming an exemption incorrectly could result in a penalty of AED 50,000 for first failure and penalty of AED 400,000 for a second failure.

Trade license and tax residency certificate: The trade / commercial license of the entity could be suspended, withdrawn or not renewed where the failure was for two years in a row. The suspension, or withdrawal of the license will make the UAE entity unable to receive a UAE tax residency certificate.

0% corporation tax rate: Free-zone companies must have sufficient economic substance in the UAE to be considered as a ‘Qualifying Free Zone Persons’ and benefit from the 0% corporation tax rate under the New Federal Corporate Tax Law that will apply to all businesses in the UAE from on or after 1 June 2023.

Our team of experts is ready to help you navigate the complexities of the Economic Substance Regulations, assist you undertake ESR analysis, submit ESR notification and report to ensure that your business is fully compliant.

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