Economic Substance Regulations
Overview of Economic Substance Regulations (ESR) introduced in the UAE:
The UAE issued Economic Substance Regulations on 30th April 2019. These Regulations require UAE onshore, free zone jurisdiction, and certain other business forms that perform any of the listed relevant activities to maintain and show an adequate economic presence in the UAE.
Such as, the ESR Relevant Activities Guide provides that UAE businesses are expected to use a “substance over form” approach to determine whether they undertake a Relevant Activity and, as a result, fall within the scope of the Economic Substance Regulations. To make this determination, Licensees should not only consider the activities stated in their commercial licenses or registration certificates but also assess the activities carried out during a financial period. According to the ESR Regulation, it is not required that a Licensee is actively engaged in any of the above business categories for it to be considered as carrying on a Relevant Activity. For example, even the passive receipt of income under one of these Relevant Activities would be considered as carrying on the activity.
Relevant Activities Subject to the Regulations:
Definition of a Licensee under the Regulations:
A Licensee is a juridical person or an unincorporated partnership registered in the UAE which undertakes a Relevant Activity. These include:
- A Limited Liability Company (LLC)
- A Private Shareholding Company
- A Public Shareholding Company
- A Joint Venture Company (JV)
- A Partnership
- A natural person, a sole proprietorship, a Trust, or a Foundation is not considered a Licensee under the Regulations.
What is the economic substance test?
The economic substance test requires a Licensee to demonstrate that:
the Licensee and the Relevant Activity are being directed and managed in the UAE;
the relevant Core Income Generating Activities (“CIGAs“) are being conducted in the UAE; andthe Licensee has an adequate number of employees and adequate physical assets and expenditure in the UAE.
It should be noted that Licensees carrying out a holding company business or a high risk IP business are subject to different economic substance test requirements. Also, CIGAs vary for each of the Relevant Activities, and a non-exhaustive list is included in Cabinet Resolution No. 31/2019.
We Can Assist & Provide Your Businesses And Organizations With The Following Services:
- Consultancy services regarding ESR guidelines
- Help companies to identify whether they qualify for Economic Substances Regulation
- Identify which Business Segment qualify for ESR Compliance
- ESR Related Training
- Facilitate and help with ongoing Economic Substance Regulation Compliance
- Secretarial Services and record maintenance for ESR Compliance
- Filing Economic Substance Regulation in a proper manner
- Submit ESR Report
Licensees Exempt from the Regulations:
The following Licensees are exempt from filing an Economic Substance Report and demonstrating substance in the UAE:
1. A tax resident outside the UAE
2. An investment fund and its underlying investment holding entities
3. A fully UAE resident-owned business that does not belong to a multinational group and operates business only in the UAE
4. A branch of a foreign entity that is liable for paying tax on all of its Relevant Income earned in a foreign jurisdiction
5. Licensees must submit sufficient evidence along with the Notification form to claim any of the above exemptions. We Can Assist & Provide Your Businesses And Organizations With The Following Services As required:
Regulatory Links for more Information;
- New Cabinet Resolution No 57 of 2020 revoking Cabinet Resolution No 31 of 2019
- Ministerial Decision 100 of 2020 ESR Guidance and Relevant Activities Guide Issued 19 August 2020
- Economic Substance UAE Economic Substance Flowchart
- Relevant Activities Summar
- Notice regarding ESR Filing Requirements and Deadlines
