Economic Substance Regulations (ESR) in the UAE

Part of UAE’s commitment as a member of the OECD Inclusive Framework, and in Economic Substance Regulations response to assessment of the UAE’s tax framework by the EU Code of conduct Group on Business Taxation.

The Regulations require UAE onshore and free zone companies and certain other business forms that conduct any of the defined specific activities to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (“Economic Substance Test”).

As part of Economic Substance Test,

Direction and Management

Licensee and Relevant Activity are being directed and managed in the UAE, including Free Zones.

Core Income Generating Activities (CIGAs)

Relevant CIGAs are being conducted in the UAE, including outsourced business.

Adequate Operating Expenses

The Licensee has adequate employees, premises, and expenditure in the UAE, including outsourced business.

As part of compliance, licensees who carry on Related Activities, and earn income from GIGAs, are required to comply with Economic Substance Regulations (ESR) as mentioned below:

Annual Notification

Licensees are required to submit an annual Notification form within 6 months to their Regulatory Authority.

Economic Substance Report

Licensees are required to file an annual Economic Substance Return within 12 months from the end of their financial year.

Maintain Relevant Records

Maintain records to demonstrate the income from CIGA commensurate with the level of employees, premises, assets, and operating expenses for at least 6 years.
Economic Substance Regulations in UAE

Relevant Activities and CIGAs

The CIGAs includes one or more of the following:

  • Raising funds and managing risk (including credit, currency, and interest risk)
  • Taking hedging positions
  • Providing loans, credit, or other financial services to customers
  • Managing capital and preparing reports for investors or any government authority with functions relating to the supervision or regulation of such business

The CIGAs includes one or more of the following:

  • Predicting and calculating risk.
  • Insuring or re-insuring against risk and providing Insurance Business services to clients.
  • Underwriting insurance and re-insurance.

The CIGAs includes one or more of the following:

  • Taking decisions on the holding and selling of investments
  • Calculating risk and reserves
  • Taking decisions on currency or interest rate fluctuations and hedging positions
  • Preparing reports for investors or any government authority with functions relating to the supervision or regulation of such business

The CIGAs includes one or more of the following:

  • Agreeing on funding terms
  • Identifying and acquiring assets to be leased (in the case of leasing)
  • Setting the terms and duration of any financing or leasing
  • Monitoring and revising any agreements
  • Managing risk

The CIGAs includes one or more of the following:

  • Taking relevant management decisions
  • Incurring operating expenditures on behalf of group entities
  • Coordinating group activities

The CIGAs includes one or more of the following:

  • Managing crew (including hiring, paying, and overseeing crew members)
  • Overhauling and maintaining ships
  • Overseeing and tracking shipping
  • Determining what goods to order and when to deliver them
  • Organizing and overseeing voyage

The CIGAs includes one or more of the following:

  • Activities related to a Holding Company Business

The CIGAs includes one or more of the following:

  • Taking strategic decisions and managing (as well as bearing) the principal risks related to:

        i) development and subsequent exploitation of the intangible asset generating income.

        ii) acquisition by third parties and subsequent exploitation and protection of the intangible asset

The CIGAs includes one or more of the following:

  • Transporting and storing component parts, materials, or goods ready for sale • Managing inventories
  • Taking orders
  • Providing consulting or other administrative services

Exemptions & Exceptions

The following are the applicable exemptions and exceptions:

  • Holding Company Business: If holds only equity interest and receives only dividend it is subject to reduced ESR requirement – maintain adequate employee and premises details pertains to CIGA.
  • Intellectual Property (IP) Business: ESR identifies certain activities in relation to IP business as elevated risk and sets out additional conditions.
  • Any Relevant Activity: If UAE government holds 51% or greater direct/indirect ownership of the licensee, such licensee is exempt from filing a return, but is required to file the notification.

Penal Consequences

If the licensee fails to comply with regulation, the National Assessing Authority may impose penalties ranging from AED 10,000 to AED 300,000 and may suspend, withdraw, or not renew the commercial license.

How can we Help? 

Our experience and professional team can assist you to:

Assess whether the business is engaged in any Relevant Activity.
Conduct an analysis whether it meets or will reasonably meet economic substance criteria for a financial year and subsequent financial years.
Assess whether relevant & sufficient documents, records, contracts, and financials are maintained.
Identify gaps and conduct impact assessment of the Regulations on the business.
Take remedial measures either through process changes or business restructuring.
Understand the reporting requirements and ensure compliance.

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