The Economic Substance Regulations (‘ESR’) were introduced in the UAE pursuant to the Cabinet of Ministers Resolution No.57 of 2020 (“Regulations”). Following this, the directives on implementation of these regulations was also introduced as per the Ministerial Decision No. 100 of 2020. As per the regulations, the UAE-based businesses that carry out the relevant activities listed in the guidance are required to demonstrate adequate economic presence by meeting the UAE economic substance test. The regulations mandate that the companies need to notify and submit an annual UAE economic substance report to the regulatory authorities if they are carrying out the relevant activities.
The ESR is part of the UAE’s efforts to align its tax regime with international standards and improve its attractiveness as a business destination. By ensuring that businesses operating in the UAE generate economic activity within its borders, the ESR will help boost domestic economic growth and create jobs.
The ESR requires all entities conducting relevant activities to meet certain substance requirements, including having an adequate physical presence in the UAE and being directed and managed from within the UAE. The purpose of the ESR is to ensure that entities conducting relevant economic activities in the UAE are doing so with a sufficient degree of economic substance.
The UAE Economic Substance Regulation (ESR) applies to all entities conducting any of the following “Relevant Activities”:
3. Investment fund management
7. Holding companies
8. Intellectual property
9. Commodities trading
All entities falling under the scope of the ESR must file an annual notification with the UAE Ministry of Economy within six months from the end of the Financial Year. Further, the Economic Substance Report will have to be filed within twelve months from the end of the relevant Financial Year.
The Regulations have appointed various authorities as the Regulatory Authority to regulate the Relevant Activities carried out by the entity. Further the Federal Tax Authority has been appointed as the National Assessing Authority to carry out the functions prescribed to it in the Regulations.
There are different criteria which need to be fulfilled in order to meet the Economic Substance Test in relation to any Relevant Activity carried on by the entity.
The failure to comply with the UAE Economic Substance Regulations will attract hefty penalties ranging from AED 20,000 to AED 400,000 depending upon the find of offence committed by the entity.
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