The UAE is a member of the OECD Inclusive Framework. As a result, the EU assessed the UAE’s tax framework, through the European Union (“EU”) Code of Conduct Group on Business Taxation. Therefore, to obtain a better rating, and improve operations, the UAE introduced a Resolution on the Economic Substance by implementing Economic Substance Regulations in UAE. Hence, the ESR regulations UAE guidelines came into force via Cabinet of Ministers Resolution No.31 of 2019, the “Regulations” on 30 April 2019. The guidance that provides further clarity on the application of the Regulations -ESR was issued on 11 September 2019. Also, the Regulations require UAE onshore and free zone companies and other UAE business forms that carry out any of the “Relevant Activities” listed below to maintain an adequate “economic presence” in the UAE relative to the activities they undertake.
- 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
Why has the UAE introduced Economic Substance Regulations?
The UAE introduced Economic Substance Rules in UAE to honour the UAE’s commitment as a member of the OECD Inclusive Framework on BEPS. Furthermore, it was in response to a review of the UAE tax framework by the EU. As a result, UAE was a part of the EU’s list of non-cooperative jurisdictions for tax purposes (EU Blacklist). The issuance on the 30th of April 2019 of the Economic Material Regulations (the Regulations) and the subsequent publication of the guideline on the 11th of September 2019 mandated that the UAE be excluded from the EU Blacklist by 10 October 2019. The purpose of the Regulations is to ensure that UAE entities that undertake certain activities (see question 4) are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE.
Hence, this helps cement the UAE’s position as a Business superpower. Also, it helps them have tighter control over business entities based in the UAE. Additionally, it also makes compliance norms more stringent, leading to better transparency, and efficiency. However, this means that companies will need to ensure they meet the required compliance to continue operations in the UAE. Hence, auditing and financial service providers have become more important than ever before.
What is the first reportable Financial Year?
The Regulations apply to financial years starting on or after 1 January 2019. Example
1: A UAE company with 1 January 2019 – 31 December 2019 financial year: First assessable period would be 1 January 2019 – 31 December 2019. Example
2: A UAE company with 1 April 2019 – 31 March 2020 financial year: First assessable period would be 1 April 2019 – 31 March 2020. No need to comply with the Regulations for the period 1 January 2019 – 31 March 2019.
Who are the “Regulatory Authorities”?
The Regulations are administered by the Regulatory Authorities listed in Cabinet Resolution No (58) of 2019 Determining the Regulatory Authorities Concerned with the Business Mentioned in Cabinet Resolution No (31) of 2019 Concerning Economic Substance Regulations in UAE.
Who is subject to the Economic Substance Regulations Dubai?
The economic substance rules in UAE apply to the following UAE companies that carry out any of the Relevant Activities;
- free zone companies
What is called as the economic substance test (ESR test)?
The economic substance test, which is also called as the ESR test, requires a Licensee to demonstrate that the relevant activity and the Licensee are being handled and managed in the UAE.
Moreover, the ESR test is to validate the relevant Core Income Generating Activities which the UAE conducts. The economic substance test helps the Licensee to have an adequate number of employees and takes care of adequate physical assets and expenditure in the UAE.
How KGRN Chartered Accountants Can help?
In the first place, KGRN Chartered Accountants can help you get a clear understanding of the new economic substance regulations in UAE. Furthermore, KGRN Chartered Accountants can conduct an impact analysis – studying and analyzing the effect of the new economic substance regulations -ESR on your existing businesses in the UAE. Additionally, our team can help you rectify errors to ensure complete compliance. Also, years’ worth of experience helps our team efficiently and effectively manage your records.
As a result, we can identify gaps in the level of economic substance in affected entities and consider remediation options where gaps are identified. Hence, KGRN Chartered Accountants can assist in relevant compliances under the new regulations.
Contact KGRN Team for Enquiries:
Managing Partner – Gopu Rama Naidu FCA, CPA, ACCA
Email: firstname.lastname@example.org Ph: +971 455 70204
More Info about ESR in UAE
- Guide For UAE Economic Substance Regulations
- What is All About Economic Substance Regulations In UAE
- Economic Substance Regulations(ESR) in UAE – Extended Deadlines For Notifications