ESR - economic substance regulations

Companies in the United Arab Emirates (UAE) should know these regulations and their requirements. Let´s talk facts...

ESR & the UAE

The ESR was introduced in the UAE in 2019 (Cabinet of Ministers Resolution No. 31 of 2019), as part of the country's commitment to comply with international tax standards and combat harmful tax practices. 

United Arab Emirates Regulations
United Arab Emirates Regulations

The regulations apply to all companies operating in the UAE, including UAE onshore, free zones and financial free zones, and certain other business forms that carry out any of the defined “Relevant Activities” listed below to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (“Economic Substance Test”).

Relevant Activities (Industries)

  • Banking Business
  • Insurance Business
  • Investment Fund Management Business
  • Lease – Finance Business
  • Headquarters Business​​
  • Shipping Business
  • Holding Company Business
  • Intellectual Property Business (“IP”)
  • Distribution and Service Center Business​

The ESR Regulations exclude certain forms of entities from the requirement to meet the Economic Substance Test. 

Exempted Licensee

For the purpose of the ESR Regulations, an Exempted Licensee includes any of the following entities registered in the UAE and which carry out a Relevant Activity as:

  • Investment Fund
  • Entity that is tax resident in a jurisdiction other than the UAE
  • Entity wholly owned by UAE residents and meets the following conditions:
  1. The entity is not part of a MNE Group
  2. All of the entity's activities are only carried out in the UAE
  • Licensee that is a branch of a foreign entity the Relevant Income of which is subject to tax in a jurisdiction other than the State
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THE ECONOMIC SUBSTANCE TEST

Under the ESR, companies that engage in the above activities are required to meet certain economic substance requirements.
In order for a Licensee to demonstrate that it has adequate substance in the UAE in a given financial year, it must meet the following:

Requirements

  • The Licensee conducts Core Income-Generating Activities (“CIGA”) in the UAE. The CIGAs are those activities that are of central importance to the Licensee for the generation of the gross income earned from its Relevant Activity.

  • The Relevant Activity is directed and managed in the UAE.

The ‘directed and managed’ test aims to ensure that a Relevant Activity is directed and managed in the UAE and requires that, inter alia, there are an adequate number of board meetings held and attended in the UAE.

These requirements include demonstrating that the company has adequate employees, physical assets, and operations in the UAE to carry out its core income-generating activities.

NOTIFICATION FILINGS & ECONOMIC SUBSTANCED REPORT

Meet Requirements

Entities that meet the above requirements and pass the Economic Substance Test must submit

  • only an annual Notification Form to their Regulatory Authority within six months from the end of the financial year of the Licensee or Exempted Licensee. The Notification must be submitted electronically.

Not Meet Requirements

Entities that do not meet the above requirements must 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.

PENALTIES

Companies that fail to submit the required notifications and reports may be subject to penalties for non-compliance, including but not limited to administrative sanctions such as the suspension, revocation or non-renewal of the entity’s trade license or permit.

Therefore, it is important for companies operating in the UAE to be aware of the ESR and ensure that they are in compliance with the regulations.

Your Expert

Ralf Löbker

DELTAKAP Middle East Tax Consultants

Managing Director, Tax Consultant, LL.M. (International Tax Law), CPAA (United Arab Emirates)

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