Economic Substance Regulation in UAE

UAE issued Economic Substance Regulations in the year 2019. The country was added to the list of non-cooperative tax jurisdictions by the European Commission and that was the reason behind the introduction of economic substance regulation in UAE. ESR in UAE is same as the economic substance requirements implemented by the Cayman Islands and Jersey. Via the implementation of economic substance regulations, UAE aims to ensure that companies which involve in certain activities do not artificially attract profits.

As per the regulations, UAE onshore and free zone companies and certain types of business that involve in any of the “Relevant Activities” are required to maintain and demonstrate an adequate “economic presence” in the country with regards to the activities they perform.

“Relevant Activities” for which economic substance regulations are applicable include;

Investment Fund Management
Headquarters Businesses
Holding Company Businesses
Intellectual Property
Distribution and Service Centers Businesses

Economic Substance regulations are applicable to the licensee in the below-mentioned cases;

  1. If the licensee carries out Income-Generating Activity in the State.
  2. If the relevant activity is taken into consideration while managing the Licensee, provided the Licensee’s board of directors holds constant meetings in the state.
  3. If there are sufficient qualified full-time employees related to that activity who are physically present in the State, or sufficient level of expenditure on outsourcing to third party service providers, whose activities, staff, expenditure, and premises are in the State. The said activities, employees, expenditures and premises must be able to fulfill the requirements of the Relevant Activity being outsourced. This is applicable to operating expenditure incurred in the state and physical assets as well.
  4. If another company is getting involved in the State Core Income-Generating Activity, the licensee must be able to monitor and control the functioning of that activity.

Cases wherein a Licensee involves only in Holding Company Business that gets its revenue from dividends and capital gains, they need to meet the Economic Substance Test provided:

  1. The licensee provides documents, records or information to the relevant Regulatory Authority with respect to the law applicable to the Licensee in the State.
  2. The licensee has sufficient employees and premises to take care of the Holding Company Business.

Entities that come under the direct/ indirect ownership of government, need not comply with the rule. UAE sovereign investment funds and other UAE government-related companies come under the exception list; however, there is no much information with respect to sole proprietorship and branches.

A relevant entity is obliged to annually report certain details about the relevant activities to their respective regulatory authority. In the case of newly formed companies, they will have to comply with the regulations upon receiving its trade license.

If a company does not fulfill the economic substance regulations in UAE or gives incorrect information to the regulatory authority, they will have to pay annual administrative penalties that range from AED 10,000 to AED 300,000. If the requirements are not met for consecutive years, there will be an increase in penalties and it can even result in the suspension of the entity’s license.

What Carvy Consultants offers?

Economic Substance Regulation (ESR) consulting
Identifying companies and business segments that come under Economic Substance Regulation(ESR) compliance
Ongoing Economic Substance Regulation(ESR) compliance
Secretarial services with regard to the record maintenance of Economic Substance Regulation(ESR)
Filing Economic Substance Regulation(ESR) with the authorities concerned, in the correct format

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Sojen Manjila, Partner

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