Economic Substance Regulations in UAE

The economic substance framework applies to all companies licensed in the UAE to control tax evasion. It was founded to regulate tax liabilities in the UAE.

This helps to streamline the advantages taken due from the low-tax systems. The regulation will apply to businesses registered onshore and offshore.

This makes it easier for businesses in the nation to pay the right amount of taxes. The UAE is a member of the OECD Inclusive structure. The Economic Substance Regulations in UAE are implemented as part of its commitment and in response to an evaluation of the country's tax structure by the European Union Code of Conduct Group on Business Taxation.

What are Economic Substance Regulations (ESR) in UAE?

The ESR was created to stop businesses, particularly multinational organizations, from artificially moving earnings to nations with low or no business income taxes in order to pay less tax in their home jurisdictions (countries). Setting up front companies in countries with low or no taxes and moving the operations there is one strategy used for this.

These businesses will not use any real resources in their operations; instead, their main goal is to lessen the tax burden on multinational firms. Since fewer taxes are now legally needed to be paid to the respective countries, they are unable to meet their budgetary obligations.

Following is a timeline for ESR deployment in the UAE:

In conclusion, Resolutions 57 and 100 are the current and operative ESR regulations in the United Arab Emirates. UAE is one of the 38 nations that make up the OECD, an intergovernmental organization.

The organization establishes detrimental tax practice prevention principles, which are followed by all of its members, with the goal of promoting global trade and economic progress. ESR is one such preventive practice, and by putting the ESR laws into effect, the UAE has reinforced its commitment to the international community.

The corporation and its transactions must represent an economic reality and serve a significant purpose other than to lessen the tax burden in order to be in compliance with ESR.

This principle is used by the Federal Tax Authority in the United Arab Emirates to determine whether or not UAE-based businesses engage in tax avoidance strategies or other practices that are considered to be "abusive."

What is an Ultimate Beneficial Ownership (UBO)?

Ultimate Beneficial Ownership (UBO) is the term used to describe the natural person who ultimately owns or controls a business whose behalf a transaction is carried out.

To Whom Is ESR Applicable?

All licensees in the UAE, including those on the mainland, in free zones, and offshore, as well as natural people, etc., who engage in activities that the ESR Regulations deem to be "Relevant Activities" (RA) are subject to ESR. The following are the RAs listed in the regulations:

• Banking Business
• Investment Fund Management Business
• Insurance Business
• Shipping Business
• Distribution & Service Centre Business
• Lease-Finance Business
• Headquarters Business
• Holding Company Business
• Intellectual Property Business.

It should be emphasized that the ESR's applicability has no upper limit. Licensees operating one or more of the aforementioned activities in the UAE must show that they have a sufficient level of economic clout there, proportionate to the nature of the RA (relevant activity) and the quantity of relevant income it generates.

What Is Economic Substance Test (ESR Test)?

Licensees to whom ESR is applicable, as stated above, must satisfy the Economic Substance Test, which entails fulfilling the following three requirements:

The Licensee carries out Core Income-Generating Activities ("CIGA") in the United Arab Emirates;

The Relevant Activity is controlled and directed in the United Arab Emirates, and

c. Considering the amount of Relevant Income generated by a Relevant Activity,

(i) employs a sufficient number of capable full-time (or equivalent) workers who are physically present in the UAE in relation to the activity (whether or not they are hired by the Licensee or by another entity and whether on a temporary or long-term contract),

(ii) has enough operational expenses in the UAE, and

(iii) possesses sufficient real estate (such as buildings) in the UAE.

To demonstrate conformity with the ESR Law, licensees to whom ESR is relevant are required to meet all the requirements of the aforementioned test.

What Are the Deadlines under ESR?

For financial years beginning on or after January 1, 2019, ESR in the UAE was applicable. You need to satisfy the following submission deadlines if your company is covered by ESR:

Is ESR Submission a One-Time Process Only?

According to the ESR regulations, each Licensee is required to evaluate each activity performed during the financial year to see if it fits under the purview of ESR.

When deciding whether they participate in a RA and are therefore subject to the ESR Regulations, businesses operating in the UAE are expected to prioritize substance above form, the UAE licensee should examine actions conducted over the course of a financial year in addition to the data on their commercial license in order to reach this determination.

What Are the Consequences of Non-Compliance?

UAE has put in place a strong framework, was failing to disclose or the inability to demonstrate that an in-scope entity has substance in the UAE may result in repercussions, such as monetary fines and license revocation. The following monetary fines and sanctions will be imposed on licensees for non-compliance:

The impact of the ESR must be understood by licensees in the UAE in order to prevent any penalties or sanctions that might be imposed and which might interfere with regular business operations.

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