As a member of Organisation for Economic Development and Cooperation (“OECD”), and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group, the UAE has committed to ensuring standards related to Base Erosion and Profit Shifting (“BEPS”) are implemented.

On 30 April 2019, the UAE enacted the ESR in Resolution No. 31 of 2019.1 Any natural or juridical person licensed by a competent licensing authority in the UAE (licensee) that carries out any relevant activity is subject to the ESR. On 11 September 2019, the United Arab Emirates (UAE) issued Ministerial Decision No. 215 of 2019 containing guidance for businesses on compliance with the Economic Substance Regulations (ESR), enacted in April. Businesses in the UAE should review the ESR and associated guidance to determine whether they are subject to the ESR requirements and the related notification and reporting requirements.

Entities covered under regulation

The rule is released on 30th April 2019 and is applicable to all Licensee carrying on the Relevant Activities in the UAE, including the Free Zone or Financial Free Zone; with effect from the year 2019.

Entities that are directly or indirectly owned by the UAE government (both federal and local) are specifically excluded from the Regulations. On this basis, UAE sovereign investment funds and other UAE government-related entities would not need to meet the UAE economic substance requirements.

The following are considered as “Relevant Activities” under the Regulations:
  • Banking
  • Insurance
  • Fund management
  • Lease-finance
  • Headquarters
  • Shipping
  • Holding company
  • Intellectual property (IP)
  • Distribution and service centre
Entities exempt from regulation

A Licensee, i.e. any commercial company which 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.

What are the economic substance requirements

To satisfy the economic substance requirements in relation to a Relevant Activity, a Relevant Entity must:

  1. Conduct the relevant “core income-generating activities” in the UAE
  2. Be “directed and managed” in the UAE
  3. With reference to the level of activities performed in the UAE
  4. Have an adequate number of qualified full-time employees in the UAE
  5. Incur an adequate amount of operating expenditure in the UAE
  6. Have adequate physical assets in the UAE

A Relevant Entity that only undertakes a Holding Company Business will be subject to less stringent economic substance requirements. Additional requirements apply if a Relevant Entity carries out “high-risk IP related activities”. If a Relevant Entity carries out more than one Relevant Activity, the economic substance requirements must be met for each of the Relevant Activities.

What are the reporting requirements under the Regulation
  • The company needs to file ESR notification with respective authority under which the company is registered.
  • The company needs to file annual return within 12 months of end of financial year or as stipulated by the relevant authority.
Penalties for non-compliance

Failure to comply would result in administrative penalties (not less than AED 10,000 but not exceeding AED 50,000 in the first year, increased to an amount not less than AED 50,000 but not exceeding AED 300,000 in the subsequent year), subject to a six-year limitation period. Additional penalties such as suspending, revoking or not renewing the UAE Relevant Entity’s trade license could also apply.

How can Accuvat Help You

Accuvat can support you in assessing the applicability along with the impact of the new legislation on your business by providing a preliminary assessment of your company’s current compliance obligations. We will also help you to define a strategy and implement a bespoke plan of action in order to mitigate any risks that are anticipated.

Ensuring that your company complies with its administrative and statutory responsibilities.

Accuvat will assist you in filing the notifications and the final report.

Support you to comply with your obligations and to focus on what you do best – manage your operations and grow your business.

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