Economic Substance Regulations

Applicable laws & Purpose

The United Arab Emirates has enacted the Economic Substance Regulations on 30th April 2019, which requires companies to have substantial activities in a jurisdiction, taking into account the global standards developed by the OECD and the EU for business taxation to curb harmful tax practicesand be removed from the EU’s list of non-cooperative tax nations.

The purpose of the Regulations is to ensure -that UAE entities which undertake certain activities are not used toartificially attract or shift profitsthat are not proportionate to the economic activity undertaken in the UAEby setting up the criteria that confirms that the Licensee is carrying out an activity in the UAE that achieves economic substance interest.

  • Cabinet of Ministers Resolution no. 31 of 30th April 2019 concerning Economic Substance Regulations.
  • Ministerial Decision no. 215 of 11th September 2019 ontheIssuanceof Directives for the Implementation oftheProvisionsoftheCabinet Decision No. 31 of 2019 Concerning Economic SubstanceRequirements.
  • Cabinet Resolution no. 58 of 4th September 2019 Determining the Regulatory Authorities ConcernedwiththeBusinessMentionedin Cabinet Resolution No (31) of 2019 Concerning Economic SubstanceRegulations.
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First reportable period

  • The UAE economic substance regulations apply to entities with a financial year commencing on or after 1 January 2019.
  • An annual notification requirement (from 1st Jan 2020) is applicable to an entity that undertakes a Relevant Activity (irrespective of whether the entity qualifies for an exemption under the Regulations or has earned income from the Relevant Activity during the relevant financial period) -;
  • In addition, entity that undertakesand earn income from a Relevant Activity, and is not exempted under the Regulations, is also required to file an Economic Substance Return(within 12 months from the end of its relevant financial period).
Who is subject to ESR?

The Regulations require UAE onshore and free zone companies, including offshore companies, branches, partnerships and other UAE business formsthat carry out any of the “Relevant Activities” listed below to maintain an adequate “economic presence”in the UAE relative to the activities they undertake: 

  • BankingBusinesses
  • InsuranceBusinesses
  • Investment Fund ManagementBusinesses
  • Lease-FinanceBusinesses
  • ShippingBusinesses
  • Holding CompanyBusinesses
  • Intellectual Property Businesses
  • Headquarter Businesses
  • Distribution and Service Centre Businesses

The Regulations apply not only to UAE entities that are part of a foreign multinational group, or that are owned by a foreign shareholder but on any UAE entity which carries on a Relevant Activity, regardless of whether the UAE entity belongs to aforeign multinational group.

Who is exempt?

A Licensee- any commercial company- that is directly or indirectly owned 51% or more by the UAE government is exempt. In this respect, the“UAE Government” includes the UAE Federal Government, as well as governments of any Emirate of the UAE

How to meet Economic Substance Regulation Test?

UAE company operating in any relevant activities must satisfy all the below economic substance requirements of the Regulations (including but not limited to) demonstrating that:

  • It conducts its core income-generating activities (CIGA) in the UAE.
  • It is managed and directed in the UAE with regards to its CIGA;
  • It possesses an adequate number of qualified full-time employees in relation to its activity and who are physically present in the UAE, or that sufficient expenditure is incurred in out-sourcing to third parties in the UAE whose activities, employees, expenditure and premises are adequate for carrying out the Relevant Activity being outsourced in the UAE;
  • It incurs adequate operating expenditure in the UAE or that adequate expenditure is incurred in out-sourcing to third parties in the UAE who meet the economic substance requirements of the UAE; and
  • It has adequate physical assets or levels of expenditure on outsourcing to third parties in relation to the CIGA in the UAE.
  • If for its outsourced CIGA, if any, it has full control and is be able to monitor the activities of the service provider.
What are the penalties for non-compliance?

Non-compliance with the Regulations may lead to administrative fines and sanctions which include:

  • A fine of up to AED 50,000 for failing to meet an economic substance test;
  • A fine of up to AED 300,000 for failing to meet an economic substance test in respect of a financial year after an initial notice of failure;
  • Sharing of information regarding the non-compliance with tax authorities in the foreign states where the affected companies are incorporated or in which their parent company, ultimate parent or ultimate beneficial owner are resident; and,
  • Suspension, revocation or non-renewal of a licence.
How can Wincore Advisory Group assist you for assessment on Economic Substance Regulations in the UAE?
  • Preliminary Assessment: Identify whether your business is within the scope of the regulations.
  • Core Assessment: If within the scope of the Regulations, check whether your business pass the Economic Substance Test.
  • Defaults Assessment: Identify the non-compliant elements if criteria of Regulations are not met.
  • Rectification Procedure: Suggestions to correct the weaknesses in order to pass the Economic Substance Test.
  • Submission of reports: Filing the notification, returns and reports to the Relevant Regulatory Authority.

For Assessment on Economic Substance Regulations in UAE

Contact Person:

Mohammed Rahali

Wincore Advisory Group

Managing Partner
M: +971 (0) 55 138 9591
T: +971 (0) 42 212 6 02

m.rahali@wincoreadvisory.com

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Mohammed Rahali

Wincore Advisory Group Managing Partner
M: +971 (0) 55 138 9591
Email

Maricar Caluracan

Wincore Advisory Group Senior Business Advisor
M : +971 (0) 58 105 1553
Email

Chinwe Azikiwe

Wincore Advisory Group Senior Business Advisor
M: +971 (0) 50 630 0821
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