Economic Substance Regulations (ESR)

Economic Substance Regulations in UAE

Economic Substance Regulations (ESR)

Economic Substance Regulations (ESR) in UAE has been recently introduced, and as a result, all UAE businesses that may be subject to these regulations should be prepared to take action and ensure compliance.

This legislation (collectively, referred to as the “Economic Substance Regulations“) were issued in response to the UAE’s inclusion in the European Union’s list of non-cooperative jurisdictions for tax purposes, and their aim is to facilitate tax transparency and fair tax competition in the UAE.

Who are subject to the Economic Substance Regulations?

The Economic Substance Regulations apply to natural or juridical (legal) persons, including all UAE onshore and free zone companies, branches, foundations, non-profit organisations and partnerships (referred to as “Licensees“) that carry out one or more of the following “Relevant Activities” in the UAE:

  • Banking businesses;
  • Insurance businesses;
  • Investment fund management businesses;
  • Lease-finance businesses;
  • Shipping businesses;
  • Headquarters businesses;
  • Holding company businesses;
  • Intellectual property businesses; and
  • Distribution and service center businesses.

What is required under the Economic Substance Regulations?

Every Licensee which carries out one or more of the Relevant Activities must submit a notification to the appropriate regulatory authority as set out in the Economic Substance Regulations.

In addition, for every financial period, any Licensee that carries out one or more of the Relevant Activities and derives income from the Relevant Activity in the UAE will be required to satisfy an “economic substance test” and submit an economic substance report with the appropriate regulatory authority within 12 months from the end of the relevant financial period.

An exemption applies to companies that are at least 51% directly or indirectly owned by the Federal or an Emirate government or a UAE-based government body or authority.

The appropriate regulatory authority varies depending on the type of Relevant Activity and the location in which it is undertaken. Each regulatory authority will set out the form of the reports to be filed and the mechanisms for submitting such forms.

What is the economic substance test?

The economic substance test requires a Licensee to demonstrate that:

  • the Licensee and the Relevant Activity are being directed and managed in the UAE;
  • the relevant Core Income Generating Activities (“CIGAs“) are being conducted in the UAE; and
  • the Licensee has an adequate number of employees and adequate physical assets and expenditure in the UAE.

It should be noted that Licensees carrying out a holding company business or a high risk IP business are subject to different economic substance test requirements. 

How SAB can help?

If your business falls under the entities with the above-mentioned activities in the UAE, then you may need assistance to determine the applicability if Economic Substance Regulations is relevant for you as you need to analyze the implication of this new regulation in the UAE.

The team at SAB Auditing assist you in making this determination; provide preliminary assessments of your company’s current compliance obligations, and assist with possible future strategies, in response to this new legislation.

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