The United Arab Emirates (UAE) has officially implemented its concept of ESR (economic substance regulations) and hence, all businesses in the country which may come under the scope of the same, should make sure that they ensure total compliance with all vital rules. The ESR was notified in 2019 by the UAE Government and passed as the UAE Cabinet Resolution Number 31/2019 as amended, pertaining to economic substance regulations in the country. The guidance was released by the Ministry of Finance as per the Ministerial Decision Number 215/209 and the Cabinet Resolution Number 58/2019 which classifies the suitable authorities in the country for regulation of business compliance under ESR.
The ESR was released after the inclusion of the UAE in the EU (European Union) list of non-cooperative jurisdictions for taxation related purposes. The aim of this decision is greater transparency in taxation and fair taxation competition in the country.
More information on ESR
The ESR (Economic Substance Regulations) will be applicable for juridical (legal) or natural individuals including all onshore and free zone entities in the UAE, foundations, branches, non-profits and partnership firms. They are all known as licensees. Relevant activities include the following:
- Insurance
- Banking
- Investment/fund management
- Shipping
- Lease/Finance
- Headquarters
- Intellectual Property
- Holding Company
- Distribution & Service Centre
The Ministry of Finance in the UAE has already released its UAE Economic Substance Regulations Relevant Activities Guide and this will help provide guidance to companies. UAE businesses or licensees should consider their business activities mentioned in their licenses/certificates of registration along with analyzing their activities executed in a specific financial duration. The Ministry has clarified that it is not essential for licensees to always be actively involved in any of the above mentioned business segments for being considered as executing an activity which is relevant.
What is needed for this purpose?
ESR mandates every licensee to submit their notification to the suitable regulatory body or authority as laid down in the regulations. For each financial timeframe/duration, every licensee carrying out one or multiple relevant activities or garnering income from relevant activities in the country, will have to undertake the economic substance test and submit their report with the authority within a period of 12 months from the conclusion of the relevant financial duration. Exemptions apply for companies with a minimum of 51% indirect/direct Federal ownership or Emirate Government ownership. This applies for companies with 51% ownership by any UAE based authority or government body as well.
The test will require licensees to show that they are managing and directing the relevant activity in the UAE and conducting the CIGAs (core income generating activities) in the country itself along with having adequate employee count, expenditure and physical assets here. Businesses should file their economic substance notifications in a timely manner with their requisite authorities. Some of these authorities include the DIFC (Dubai International Financial Centre) or Dubai Airport Free Zone which have varying deadlines for filing. If you need help with company incorporation in the UAE, VAT registration, filing VAT, auditing, accounting and other necessary business processes, you can consider reaching out to GCC Filings, a one-stop solution for businesses in the country.