Economic Substance Regulation
EconomicSubstance
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UAE Economic Substance Regulations & ESR filing in UAE
The economic substance regulations are aligned with the OECD’s global standard to curb harmful tax practices. One of the four pillars of this OECD framework is the absence of a requirement to ensure that an economic activity conducted, is substantial. The idea is to discourage tax evasion and avoidance and introduce better tax governance at a global level. UAE legal authorities at the highest level have decided to align themselves with this all-encompassing and all-inclusive European framework of OECD on base erosion and profit shifting (BEPS) and have made a resolute commitment to adhere to its minimum standards. UAE is in a “No or nominal tax jurisdiction” NOON environment and is in line with similar environments that are party to this framework.
The economic substance regulations are another critical compliance requirement for entities registered in the UAE now and have to comply with the latest Cabinet Resolution 57/2020, which revoked the earlier Cabinet decision 31/2019.
Applicability of UAE Economic Substance Regulations
This regulation is applicable and mandatory for all licensees and exempted license carrying registered entities operating in the business environment of UAE.
Relevant Activities under UAE Economic Substance Regulation
Banking business
Lease-finance business
Intellectual property business
Shipping business
Distribution and service center business
Investment fund management business
Headquarter business
Holding company business
Insurance business
Exempt Licensee as per Cabinet Resolution 57/200
A licensee that resides in a tax jurisdiction other than UAE
An investment fund
A licensee is a branch of a foreign entity whose income is subject to tax in a jurisdiction other than the UAE
A licensee that is wholly owned by more than one UAE resident and meet the following criteria:
An entity should carry business only in UAE
An entity should not be a part of the MNE group
How to meet the
economic substance test
Verify that the entity conducts Core Income generating Activity – CIGA in the emirates
Verify that the entity is managed within the State regarding that activity being conducted.
Ensure and verify that the entity employs a significant number of full-time employees or incurs a significant level of operating expenses and maintains adequate assets needed to perform the relevant activity.
If CIGA is conducted by another activity, then verify if that licensee maintains full control and can monitor the activity of another entity.
All exempted licensees are required also to submit all documents and information to claim their status of exempted licensees. Notifications and ESR report must be filed within 6 months and 12 months respectively from the end of its financial year or as shown in the following table:
| Financal Year End |
|---|
| December 2019 |
| March 31 2020 |
| June 30 2020 |
| September 30 2019 |
| ESR nottification of Mof Portal |
|---|
| Deadline extended till 31 Jan 2021 |
| Deadline extended till 31 Jan 2022 |
| Deadline extended till 31 Jan 2023 |
| Deadline extended till 31 Jan 2024 |
| ESR nottification of Mof Portal |
|---|
| Deadline extended till 31 Jan 2020 |
| March 31 2021 |
| June 30 2021 |
| September 30 2021 |
Penalties in case of non –
compliance with ESR
| Particulars |
|---|
| Failure to submit beore due dat |
| Submisson or inaccurate or informaion |
| ESR Reporting (Penalties AED) |
|---|
| AED 20,00 |
| AED 50,000 |
| ESR Reporting (Penalties AED) |
|---|
| AED 20,00 |
| AED 50,000 |
Penalty in case of failure
to submit the notification
In case of failure to submit the required notifications, documents or inaccurate information, an administrative penalty of AED 50,000 will be imposed on both licensee and exempted licensee
How ebs
can help you?
Our team of experts will first conduct a preliminary check on your organization to check for the viability and applicability of Economic Substance Regulation.
If applicable, we verify that the criteria are met or not. In case they are found wanting, then we support and guide you in identifying those gaps areas and provide suggestions and recommendations to overcome those gap areas.
We will also assist the licensee in the entire filing process of information notification with the relevant authorities
FAQ’s
Economic substance regulation in UAE imposes a requirement for UAE entities that earn income from any of the related activities to maintain the economic substance in the UAE specific to each activity.
The UAE applies ESR to local companies located in the country, including free zone businesses and those engaged in any relevant activities.
The ESL will apply to all UAE companies, including those registered in Financial Zone or Free Trade Zones, that carry out one or more of the following relevant activities as Insurance businesses, banking businesses, and investment fund management businesses.
Businesses in the UAE that have a financial year ending 31st May 2022 and are involved in a ‘Relevant Activity’ need to file for ESR in UAE during that financial year.
The UAE introduced the Economic Substance Regulations to prevent and restrict harmful practices. Economic Substance Regulations were applicable for the accounting year starting from or after 1 January 2019.
An entity that fails the Economic Substance regulation test in a relevant financial year will be fined ranging from 10,000 AED to 50,000. Companies that fail the exam in the following years will be subject to a fine ranging from 50,000 AED to 3000,000 AED.
