Companies in the United Arab Emirates (UAE) should know these regulations and their requirements. Let´s talk facts...
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.
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)
The ESR Regulations exclude certain forms of entities from the requirement to meet the Economic Substance Test.
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:
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:
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.
Entities that meet the above requirements and pass the Economic Substance Test must submit
Not Meet Requirements
Entities that do not meet the above requirements must submit
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.
DELTAKAP Middle East Tax Consultants
Managing Director, Tax Consultant, LL.M. (International Tax Law), CPAA (United Arab Emirates)