Economic Substance Regulations in UAE

Economic Substance Regulation has been newly introduced in the United Arab Emirates through the Cabinet Decision Number 31 of 2019. The decision to implement ESR in the country was taken in response to the assessment of the Tax Framework of the country by the European Union and as a member of the Organization for Economic Development and Cooperation (OECD).

The regulation will be applicable to businesses that are registered Onshore as well as businesses registered in the Free Zones. The impact of this regulation will be huge and will greatly reduce tax evasion and will make sure that the correct amount in taxes is paid by the various companies in the country.

The UAE Government recently issued the "Cabinet Resolution No. 57 of 2020" which will replace the previous ESRegulations. They will also help clarify the amended ES Regulations and will be applicable from 1 January 2019.

To know more about the changes made Read our blog : Changes to ESR Regulations in UAE- August 2020  

Economic Substance

How can Economic Substance Regulations in UAE process help your business to grow?

Enhances the Goodwill of the Company

Complying to the Economic Substance Regulation will allow the investors to sense of relief that the company can be trusted. This will attract more potential investors for the company.

Prevent Tax-Related Fraud in the Country

ESR will provide a correct picture of the taxes required to pay the company and will also create transparency for the government.

Enhance Fair Competition

Every company will have to comply with the Economic Substance Regulations, which will lead to a reduction in bogus and fraudulent companies.

Support the Economy of the Country

The implementation of this regulation will increase the revenue from the taxes paid by the companies, which will, in turn, affect the economy in a positive way.

What does one mean when a Company is being subjected to Economic Substance Regulations in the United Arab Emirates?

If a business entity earns income from a “Relevant Activity” which have ben specified, they need to take part in an Economic Subsance Test which will help in clarifying the following points:

  • The “Relevent Activity” is being conducted and managed in the Country.
  • All the relevant Core Income Generating Activites (CIGA) are conducted in the Country.
  • The business entity files an Economic Substance Return witin 12 months of the end of the Financial Year in the country.

Which Entities need to Abide by the Economic Substance Regulations?

Any and all business entities which are present Onshore, any Freezone companies or any other UAE business which take part in and conduct the following "Relevent Activites" need to follow ESR as mentioned by the government regulations. The "Relevent Activities" are:

  • Insurance Busines
  • Shipping Business
  • Intellectual Property Business
  • Lease-Finance Business
  • Investment Fund Management Business
  • Headquarter Business
  • Holding Company Business
  • Distribution and Servcie Centre Business
  • Banking Business

For more details Read: What are the Relevant Activities according to Economic Substance Regulations (ESR)?

What are the penalties to be faced in case of Non-Compliance of ESR in the country?

As per the amended Cabinet Decision Article, a licensee must meet all the requirements of the Economic Substance Test. The Changes made in the penalies after the amendment are mentioned below:

  • A fixed penalty of 20,000 dirhams (AED 20,000) shall be imposed on the business in case the company fails to notify the concerned Authority.
  • If the management of the company fails to provide complete information about the company then a penalty is levied, which can go up to a maximum of AED 50,000.
  • If the company fails to show any Economic Substance or fails to show an adequate amount of Economic substance, then the following penalties will be levied upon the business:
    • Penalty for the First year
      • Penalty up to AED 50,000
      • Exchange of the information with a foreign Competent Authority
        • Of the Parent Company
        • Of the Ultimate Parent Company
        • Of the Ultimate Beneficial Owner
    • Penalty for the Second year and Subsequent years
      • Penalty up to AED 400,000
      • Information Exchange of
        • The Parent Company
        • The ultimate Parent Company
        • The ultimate Beneficial Owner
  • The commercial licence of the company can be withdrawn, suspended or not renewed

Who should file an Economic Substence Return and by When?

Only the business entities which earn income from the Relevant Activities ,mentioned above, during the relevant financial period and are not exempt from the specified Regulations are required to show economic substance in the country and are also required to file an economic substance return.

The economic substance return must be filed within 12 months from the end of the relevant financial period.

How JAXA can help you?

With a team of accounting professionals, JAXA stands as certified public accountants in Dubai, and can cater to your accounting needs.

How can JAXA Chartered Accountants help you

Our Strengths

  • Accurate analysis of the business and the business activities
  • A dedicated team of experts
  • High quality and customized business solutions
  • Vast experience from various sectors in various companies

How JAXA can help your business?

The ESR will be implemented on all the companies in the UAE, and it will be an annual affair. Thus a company will have to deal with the reports on an annual basis. The experts at JAXA Chartered Accountants will understand your business and accordingly provide a solution to the company.  The team at JAXA will be happy to analyze all the activities of your business and decide if the company is compliant with the regulation or not. You can Contact Us for more information on ESR in the UAE.

Frequently Asked Questions (FAQs)

1. Why is the Economic Subastance Regulaions introduced in the UAE?

The ESR was introduced in response to the European Union including the UAE Tax Framework to the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist) on the 30th of April 2019. 

On the 10 of August,2020 amendment were introduced in the form of Cabinet Resoulution No. 57 which repeals the Original ESRegulations.

2. What is the purpose of ESR?

The primary purpose of the ESR is to keep a check that the UAE business entities do not inflate their profits artificially.

3. Who is excluded from the Economic Substance Regulation?

According to the revised ESResolution, the following entities which undertake Relevant Activity in the UAE -

  • An Investment Fund (It will include its underlying SPVs and/or Investment Holding entities)
  • An Entity that is tax resident outside the UAE
  • Branch of a foreign entity whose relevant income is subject to tax outside the UAE
  • An Entity which is wholly owned by UAE residents and meets the following conditions:
    • The Entity is not part of a MNE Group
    • All the activities of the Entity are exclusively carried out in the UAE

4. What if the business entity conducts the “Relevant Activity” but no income is earned?

In such a case the business entity will be require to submit the relevant notification to the Regulatory Authority but there is no requirement to file an conomic Substance Return for the financial period.

5. Do the business entities which are going through liquidation need to file ESR notification?

Yes

For any more details and information about the Economic Substance Regulation, you can Contact Us. We will provide you with in-deapth information and other useful background information which will help your business to be compliant and more profitable.