Economic Substance Regulations (ESR) in the UAE - A Brief Guide By FinApt Group

As part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the “Regulations”) on 30 April 2019.

Guidance on the application of the Regulations was issued on 11 September 2019 (Ministerial Decision No. 215 of 2019), and Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies lists the Regulatory Authorities tasked with the administration and enforcement of the Regulations.

Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020, and updated Guidance was issued on 19 August 2020 (Ministerial Decision No. (100) of 2020.

ESR regulations aim to ensure companies conducting certain relevant activities have substantial economic presence. They apply to various business activities in UAE.

Non-compliance can lead to penalties, fines, and reputational damage. It’s essential to adhere to ESR requirements.

We provide a comprehensive approach, including analysis, documentation, and ongoing support to help businesses meet ESR regulations.

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

In 2019, the United Arab Emirates implemented Economic Substance Regulations (ESR) to ensure that companies carrying out certain relevant activities and earning income from the UAE have an adequate economic presence and substance in the country. These regulations align the UAE with international standards set by the European Union and the Organization for Economic Co-operation and Development (OECD) related to anti-tax avoidance practices.

At FinApt Group, we recognize the importance for businesses to adhere to the Economic Substance Regulations (ESR) in the United Arab Emirates (UAE). These regulations aim to ensure that businesses operating in the UAE demonstrate economic substance in the region. We offer a comprehensive suite of compliance services tailored to assist your organization in meeting the requirements of the ESR. With our expertise and customized solutions, you can navigate the complexities of regulatory compliance with confidence and ease, while ensuring your business remains resilient and competitive.

Scope of ESR

The ESR applies to UAE companies, including free zone companies, that conduct one or more of the following Relevant Activities:

  • Banking
  • Insurance
  • Shipping
  • Fund Management
  • Finance and Leasing
  • Headquarters
  • Intellectual Property
  • Distribution and Service Centers

If company derives income from these activities in the UAE, it must meet the Economic Substance Test by having an adequate substance in the UAE relative to the activities performed.

Identification of Relevant Activities for Economic Substance Regulations is essential for businesses operating in the UAE. Our team of experts collaborates closely with your organization to assess applicability of ESR framework. We provide comprehensive support to strengthen your compliance posture and mitigate regulatory risks effectively.

Economic Substance Test Assessment

To comply with the ESR, companies need to ensure they meet all three economic substance tests:

  1. Conduct Core Income Generating Activities (CIGAs) in the UAE related to the relevant activity.
  2. Be directed and managed in the UAE for CIGAs.
  3. Have an adequate level of qualified employees, expenditures and physical assets in the UAE.

Conducting an economic substance test assessment is a critical step in ensuring compliance with the ESR. Our experienced professionals assist you in evaluating your business activities against the specified criteria outlined in the regulations. Through thorough analysis and assessment, we help you determine whether your business meets the economic substance requirements mandated by the UAE authorities.

Regulatory Supervision and Penalties

Enhanced Regulatory Compliance:

Compliance with the Economic Substance Regulations demonstrates your commitment to adhering to regulatory requirements in the UAE.

Mitigated Regulatory Risks:

By implementing robust compliance measures, you minimize the risk of regulatory penalties and sanctions associated with non-compliance.

Enhanced Business Reputation:

Demonstrating economic substance enhances your business reputation and credibility among stakeholders, including customers, partners, and investors.

Access to Global Markets:

ESR compliance enables your business to access global markets and participate in international transactions with confidence.

Operational Efficiency:

Implementing compliance measures streamlines your business operations, driving efficiency and optimizing resource allocation.

Partner with Us for Comprehensive ESR Compliance Solutions

At FinApt Group, we are committed to helping businesses navigate the complexities of Economic Substance Regulations compliance with confidence and ease. Our team of compliance professionals brings extensive experience and expertise in regulatory compliance, ensuring that you receive tailored solutions that meet your unique needs.

Whether you need assistance with policy development, compliance assessment, or ongoing support, we are here to partner with you every step of the way. Contact us today to learn more about how we can help safeguard your business and unlock the benefits of ESR compliance.