To push its agenda of creating a OECD Inclusive framework in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the United Arab Emirates came up with and issued Economic Substance Regulation or ESR in Cabinet of Ministers Resolutions No. 31 of 2019. The guidelines for the application of regulations were issued on 11th September 2019. Later that year, a list of Regulatory competencies was made and the regulatory authorities were given the task to enforce these regulations.
As per those regulations, on shore and free shore companies active in UAE are required to demonstrate an adequate economic presence pertaining to the relevant activities as given below:
The above mentioned regulations became applicable from the financial year starting with January 2019. Entities that are within the scope of those regulations are required to submit an Annual notification form to the Regulatory authority. Within 12 months of submitting the notification form, they are also required to submit an Economic Substance Report.
In case the entity is beyond the scope of the ESR regulations or it has not earned income from a relevant activity as mentioned in the list above, that entity isn’t required to file the Economic Substance Report. However, that doesn’t exempt the aforementioned entity from filing the annual notification form.
In case the entities don’t comply to the regulations, they can face penalties that:
Let’s now discuss some of the major questions associated with ESR – Economic Substance Regulations.
The responsibility of enforcing the ESR falls upon the shoulders of the “Regulatory Authorities”. As per the Article 4 of Economic Substance Regulations, these regulatory authorities are divided into two categories:
For Dubai, the regulatory authorities are:
For Sharjah, following are the regulatory authorities:
For Ajman, following are the regulatory authorities:
For Ras Al-Khaimah, following are the regulatory authorities:
For Um Al-Quwain, following are the regulatory authorities:
For Fujairah, following are the regulatory authorities:
As the regulatory authorities are responsible for enforcing the Economic Substance Regulations, following are the duties they have to abide by:
A licensee is referred to as a Juridical person or an incorporated business entity in the United Arab Emirates undertaking a relevant activities. A licensee can be:
The administrative requirements that licensees who come under ESR’s scope are as follows:
Each Economic Substance Report or ESR that the licensee files has to meet the Economic Substance Test. As per the test criteria, the licensee is required to demonstrate the following through the report:
As we have hinted during the introduction of this article, there are certain circumstances under which an entity is exempted from being under the scope of Economic Substance Regulations. Following is the list of those circumstances:
ESR came into existence to make the UAE’s industrial infrastructure become more inclusive to the OECD norms. By asking the entities that fall within the scope of regulations to have an adequate presence in the UAE, it has taken the first step to create better business policies in the free zones – both onshore and offshore.
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