economic substance regulation

International tax Advisory Services in Dubai ,United Arab Emirates

Economic Substance Regulation (ESR) Advisory

The Economic Substance Test requires a Licensee to demonstrate that: the Licensee and Relevant Activity are being directed and managed in the UAE

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Why Has The UAE Introduced Economic Substance Regulations?

The UAE introduced Economic Substance Regulations to honor the UAE’s commitment as a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS), and in response to a review of the UAE tax framework by the EU which resulted in the UAE being included on the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist). The Regulations ensure that UAE entities that undertake certain activities are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE. The Regulations are effective from 1 January 2019, and apply to financial years starting on or after 1 January 2019.

What Is Economic Substance Regulation In UAE?

The Economic Substance Test requires a Licensee to demonstrate that: the Licensee and Relevant Activity are being directed and managed in the UAE; the relevant Core Income Generating Activities (“CIGAs”) are being conducted in the UAE; and The entity will need to be directed and managed in the jurisdiction with regards to the relevant activity & The entity will need to have an adequate number of qualified employees, incur adequate expenditure in the jurisdiction proportionate to the level of activity and have adequate physical presence in the jurisdiction (e.g. office space, facilities, etc.). Find more here 

Who Is Subject To These Regulations?

The regulations set out a reporting framework that applies to companies and/or licensees carrying out “Relevant Activities”. These activities are listed as follows:

  • Banking Business
  • Insurance Business
  • Investment Fund management Business
  • Lease – Finance Business
  • Headquarters Business
  • Shipping Business
  • Holding Company Business
  • Intellectual property Business (“IP”)
  • Distribution and Service Centre Business

Persons excluded from ESR applicability

  • Natural Persons, sole proprietorship, trust and a foundation will not be treated as licensees for the purpose of ESR and therefore do not need to file a notification or meet the Economic Substance Test
  • A Licensee that is tax resident outside the UAE;
  • An Investment Fund and its underlying SPVs / investment holding entities;
  • An entity wholly owned by UAE residents and

(i) Entities are not part of a multinational group, and

(ii) All activities of business are carried out only in the UAE.

  • A branch of a foreign entity that is subject to tax on all of its Relevant Income in a foreign jurisdiction;
  • Any other Licensee at the direction of the Minister of Finance.

An Exempted entity must

(i) file a notification and

(ii) provide sufficient documentary evidence to substantiate the exemption status

Economic Substance Test and Reporting Requirements

  • Requirement of at least one meeting to be held in the UAE is now removed
  • Financial statements are now mandatorily required to be submitted with Economic Substance Report 

Notification Filings

Every Licensee and Exempted Licensee is required to submit a Notification to their respective Regulatory Authorities setting out the following for each relevant Financial Year

  1. The nature of the Relevant Activity being carried out.
  2. Whether it generates Relevant Income
  3. The date of the end of its Financial Year
  4. Any other information as may be requested by the Regulatory Authority.

According to Revised ESR, the Notification must be submitted within six months from the end of the Financial Year of the Licensee or Exempted License.

 Economic Substance Report  

Every Licensee shall be required to meet the applicable Economic Substance Test requirements and submit an Economic Substance Report containing the requisite information and documentation prescribed under the ESR Regulations within twelve  months from the end of the relevant Financial Year.

Why RVG?

We Can Assist You In

  • Identifying whether your activities fall within the scope of qualifying entities for Economic Substance Regulation(ESR) compliance,
  • Identify the qualifying business segments for Economic Substance Regulation(ESR) compliance
  • Filing Annual Notification with the regulatory authority
  • Comprehensive Evaluation of the company’s current state of compliance and
  • providing recommendations with regards to the Economic Substance Test and
  • Secretarial services in connection with Economic Substance Regulation (ESR) record maintenance.
  • Submitting Economic Substance Return to the regulatory
  • Free Consultation

ESR FAQ

A UAE business that undertakes one or more of the above activities during the relevant Financial Year is referred to as a Licensee. Where a business carries out one or more of the above activities but is exempt from certain requirements under the Economic Substance Regulations, the entity is referred to as an Exempted Licensee.

Yes, the business must report all Relevant Activities undertaken during the Financial Year, irrespective of whether the Relevant Activity was conducted throughout the entire Financial Year

No, each Licensee must file a Notification on a stand-alone basis, irrespective of whether the Licensee is part of a consolidated group for accounting or VAT purposes

No, the UAE head office / parent company must file a single consolidated Notification that includes details of all its UAE branches that carry out a Relevant Activity, irrespective of whether the head office itself undertakes a Relevant Activity.

The Notification must be submitted electronically on the Ministry of Finance ESR portal.

If the Licensee undertakes a Relevant Activity in the year of liquidation, the entity or its liquidators must ensure
that all obligations under the Economic Substance Regulations are satisfied for the period up to liquidation,
including the filing of a Notification and Economic Substance Report (where applicable)

Non-compliance with the obligation to file a Notification before the deadline is subject to a penalty of AED 20,000

Providing incorrect or false information in the Notification is subject to a penalty of AED 50,000. Knowingly providing incorrect or false information or incorrectly claiming an exemption from the Economic Substance
Regulations can result in the Licensee being deemed to have failed the Economic Substance Test for the relevant
Reportable Period

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