Economic Substance Regulations in UAE

June 11, 2020

The Economic Substance Regulations (ESR) in the United Arab Emirates (UAE) were introduced to ensure that businesses operating in the country have a substantial economic presence and conduct real economic activities. Here’s an overview of the Economic Substance Regulations in the UAE:

1. Background: The ESR were introduced in response to the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, which aims to prevent tax evasion and profit shifting by multinational companies through artificial arrangements.
2. Scope: The ESR apply to all companies and other forms of business entities that carry out “Relevant Activities” in the UAE. Relevant Activities include banking, insurance, fund management, lease finance, headquarters, shipping, intellectual property, and holding company business.
3. Compliance Requirements: Companies engaged in Relevant Activities are required to meet certain substance requirements to demonstrate that they have a substantial economic presence in the UAE. This includes conducting core income-generating activities, having an adequate number of qualified employees, incurring adequate operating expenditures, and having physical assets and premises in the UAE.
4. Reporting Obligations: Companies subject to the ESR are required to submit an annual Economic Substance Notification (ESN) to the relevant regulatory authority, disclosing information about their activities and compliance with the substance requirements. In addition, companies that meet the “Relevant Activity” criteria are required to prepare and submit an annual Economic Substance Report (ESR) along with supporting documentation.
5. Regulatory Authorities: The regulatory authorities responsible for overseeing compliance with the ESR vary depending on the jurisdiction and the type of business activity. In the UAE, regulatory authorities such as the Ministry of Finance, the Ministry of Economy, and the respective free zone authorities are tasked with enforcing the ESR and conducting compliance assessments.
6. Penalties for Non-Compliance: Failure to comply with the Economic Substance Regulations may result in penalties, sanctions, or other enforcement actions by the regulatory authorities. Penalties may include financial penalties, suspension or revocation of licenses, and reputational damage.
7. Guidance and Support: Regulatory authorities in the UAE provide guidance and support to businesses to help them understand and comply with the Economic Substance Regulations. This includes issuing guidance notes, conducting workshops and seminars, and offering assistance to businesses in interpreting and implementing the requirements.
8. International Cooperation: The UAE government collaborates with international organizations and jurisdictions to ensure alignment with global standards and best practices in tax transparency and compliance. This includes exchanging information with other jurisdictions through mechanisms such as tax information exchange agreements (TIEAs) and the Common Reporting Standard (CRS).

Overall, the Economic Substance Regulations in the UAE aim to promote transparency, fairness, and compliance in the taxation of business activities, ensuring that companies operating in the country contribute to the local economy and abide by international tax standards. Businesses subject to the ESR should ensure they understand their obligations and take appropriate measures to comply with the requirements.