As part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the “Regulations”) on 30 April 2019. Guidance on the application of the Regulations was issued on 11 September 2019 (Ministerial Decision No. 215 of 2019), and Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies lists the Regulatory Authorities tasked with the administration and enforcement of the Regulations. Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020, and updated Guidance was issued on 19 August 2020 (Ministerial Decision No. (100) of 2020 The Regulations require UAE onshore and free zone companies 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
- 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 Centre Business
What are economic substance Regulations?
The purpose of the Regulations is to ensure that UAE entities undertaking certain activities report actual profits that are commensurate with the economic activity undertaken within the UAE.
What is the purpose of economic substance regulation?
The EU’s efforts to combat tax evasion go beyond the jurisdiction of the EU. The UAE Government introduced Economic Substance Regulations in 2019 as a response to being blacklisted by the EU for tax purposes following an assessment of the UAE’s tax framework by the EU Code of Conduct Group on Business Taxation.
What requirements do UAE entities need to meet ESR?
UAE entities undertaking and earning income from a Relevant Activity in a financial year must perform the related “Core Income Generating Activities” in the UAE by demonstrating that:
- The entity and Relevant Activity are being “directed and managed” from the UAE (through holding and minuting board meetings in the UAE, having a UAE based manager and/or directors etc.); and
- The entity has an adequate number of qualified employees, premises (e.g. office space), and annual operating expenditures in the UAE relative to the activity undertaken.
It is possible for an entity to carry on more than one Relevant Activity at a time, in which case generally the economic substance requirements will need to be satisfied for each Relevant Activity.
Different economic substance requirements apply depending on the Relevant Activity carried on. For example, pure holding companies are subject to less stringent economic substance requirements, but additional economic substance requirements apply to “high risk” IP-related activities.
How do I submit economic substance Regulations?
Entities that are within the scope of the Regulations are required to 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 (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019). An entity is not required to meet the Economic Substance Test and file an Economic Substance Report for any financial period in which it has not earned income from a Relevant Activity or if it meets the conditions for being exempt. A Notification form will need to be submitted regardless. Failure to comply with the Regulations can result in penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), as well as other administrative sanctions such as the suspension, revocation, or non-renewal of the entity’s trade license or permit.