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UAE Economic Substance
Regulations Update

The Economic Substance Regulations has a huge impact on many companies
in the UAE especially ones which have related entities outside the UAE.

Economic Substance Regulation

(ESR) Services

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.

On August 2020 amendments were introduced to Resolution 31 by the Cabinet Ministers by way of Cabinet of ministers Resolution No. 57 of 2020, which repealed and replaced Resolution 31. This will complement the VAT in the UAE. The (Federal Tax Authority) FTA is expected to take a pragmatic approach when assessing whether a Licensee has met the Economic Substance Test.

The impacted corporate structures:

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”).

What are the relevant activities?

  • 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​

When will it apply:

The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are within the scope of the Regulations are required to submit an annual Notification form to their Regulatory Authority, and complete and submit to the same Regulatory Authority an Economic Substance Report within 12 months from the end of their financial year (for example 31 December 2020 for entities with a financial year ending 31 December 2019). An entity is not required to meet the Economic Substance Test and file an Economic Substance Report for any financial period in which it has not earned income from a Relevant Activity or if it meets the conditions for being exempt. A Notification form will need to be submitted regardless.

Failure to comply with the Regulations can result in penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), as well as other administrative sanctions such as the suspension, revocation or non-renewal of the entity’s trade license or permit.

Be ESR compliant today:

Averyx can help you in meeting all your ESR compliance requirements. Our compliance experts have extensive knowledge, ESR, international accounting and international taxation. They can ensure your company is fully compliant. Call us today for obligation free consultation.

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