To ensure compliance with economic substance regulations (ESR), major regulatory organizations have been introduced throughout the world. In order to comply with these regulations, businesses operating in jurisdictions with minimal tax liability obligations must demonstrate to the jurisdiction that they have adequate economic substance in the country.
Among the rules are the requirements for the regular recording, tracking, and reporting of all relevant economic activities carried out by legal entities in the United Arab Emirates, including companies, subsidiaries, and branches, as well as those located in any of the free zones.
The Economic Substance Regulations were published as part of the Cabinet of Ministers Resolution No. 31 of 2019. Following the implementation of local substance regulations, the UAE was removed from the EU's blacklist in October 2019.
UAE now belongs to the BEPS Inclusive Framework (BEPS IF), which includes more than 130 nations and jurisdictions. As an Inclusive Framework member, the UAE is committed to implementing the minimum standards monitored by BEPS IF to increase tax-related transparency, which the regime imposes on itself.
In accordance with BEPS, UAE has complied with a set of four minimum standards:
- Combating harmful tax practices
- Preventing the grant of tax benefits for inappropriate reasons
- Country-by-Country Reporting (CbCr)
- Obtaining Mutual Agreements
According to UAE's ESR, businesses must determine whether the newly introduced regulations apply to them. Therefore, it is necessary to acclimate strategies in order to prepare for the notification and reporting requirements prescribed by their appropriate Regulatory Authority for companies that demonstrate they conduct substantial economic business within the region.
All UAE legal entities must comply with an ESR Notification template issued by the UAE Ministry of Finance and various Regulatory Authorities, unless otherwise prescribed by the relevant Licensing Authority, to notify and report whether or not they engage in and generate income from the list of relevant activities to their relevant Regulatory Authority.
In order to avoid fines and administrative penalties, their Notification must be submitted by the deadline set by their corresponding Licensing Authority.
Which individuals are required to submit a notification of economic substance?
Any licensee who undertakes one or more of the following Relevant and Core Income Generating Activities during a relevant year must file a Notification with the Registration Authority:
Economic Substance Regulations (ESR) Date Table for ESR Notification and Reporting Filing
| Financial Year End | Notification filing deadline | Report filing deadline |
|---|---|---|
| 30-Jun-23 | 31-Dec-23 | 30-Jun-24 |
| 31-Jul-23 | 31-Jan-24 | 31-Jul-24 |
| 31-Aug-23 | 28-Feb-24 | 31-Aug-24 |
| 30-Sep-23 | 31-Mar-24 | 30-Sep-24 |
| 31-Oct-23 | 30-Apr-24 | 31-Oct-24 |
| 30-Nov-23 | 31-May-24 | 30-Nov-24 |
| 31-Dec-23 | 30-Jun-24 | 31-Dec-24 |
| 31-Jan-23 | 31-Jul-24 | 31-Jan-24 |
| 28-Feb-23 | 31-Aug-24 | 28-Feb-24 |
| 31-Mar-23 | 30-Sep-24 | 31-Mar-24 |
| 30-Apr-23 | 31-Oct-24 | 30-Apr-24 |
| 31-May-23 | 30-Nov-24 | 31-May-24 |
According to the Regulations, what are the requirements for economic substance compliance?
The ESR requirements are the responsibility of all licensees regardless of whether they are onshore, offshore, or operating in a free zone. A company must re-evaluate its corporate governance structures and use models, and make the necessary changes were necessary in order to demonstrate substantial economic substance. According to the regulations, UAE companies are required to comply with the following requirements:
- To generate income for the company, the company must carry out its core income-generating activities in the UAE.
- There must be proof that the company is directed and managed within the UAE regarding its business activities and that there is a quorum of directors and shareholders physically present in the UAE.
- To carry out relevant business activities in the UAE, the company needs to have sufficient full-time employees, incur operating expenses, possess physical assets; and
- The company's outsourced activities must be controlled and monitored by the company.
ESR Notification & Report
Unless specified by the Licensing Authority, all UAE companies (onshore, offshore, and Free Zone) performing 'Relevant Activities' during the year must file a notification according to the template specified by the Licensing Authority.
In accordance with the Regulation, the notification must include the following:
- A company's ability to carry out relevant activities.
- An outline of the company's relevant activities and the type of revenue generated by those activities.
- The taxability of income derived from core income-generating activities in jurisdictions outside of the UAE.
- Whether the licensee is a tax resident outside of the UAE, and if so, where; and
- A minimum of 51% of the stock in the business is owned by the Federal or Emirate Governments or a UAE Government body or authority.
A report must be submitted to the Regulatory Authority annually to demonstrate that the company meets the economic substance requirements.
In an Economic Substance Report, the following information should be included:
- Earnings from relevant activities, including value and type.
- The property or equipment used for conducting the activities and the location of the activities.
- An analysis of the employee numbers, qualifications, and people responsible for the activities; and
- A statement indicating that the company meets the Economic Substance Test.