Economic Substance Regulation (ESR)

Elevate provide Economic Substance Regulation in Dubai, UAE

Zero Tax Jurisdictions must introduce Economic Substance Regulations in UAE to counter (harmful) Profit Shifting is the purpose of ESR, an initiative by Organization for Economic Co-operation and Development

The United Arab Emirates has in coordination with the Ministry of Finance implemented Economic Substance legislation in order to comply with its commitment as a member of the OECD (to comply with EU’s requirements to be removed from the list of non-cooperative tax nations). The Economic Substance Regulations are applicable to all the Licensees within the UAE’s jurisdiction and include all Licensees operating within free-zones in UAE. Offshore Companies, any person or company holding a trade license or certificate of incorporation to carry out any business activity is coming under Economic Substance Regulations. This is in the benefit of the real investors in UAE & a company in UAE will have its Global value.

Because of zero corporate tax many global business house has opened their Head Offices in UAE. Sometimes the profit shifting to UAE is harmful and loss for countries where there is tax.

Economic Substance rules pointed at companies based in low tax jurisdictions such as Bahrain, Bermuda, BVI, Cayman Islands, Isle of Man, Jersey, Guernsey, Mauritius, Bahamas, Seychelles, and United Arab Emirates.

  • Reporting income in low tax jurisdiction without any real economic activity and substance in that jurisdiction.
  • Activities in relation to the income effectively take place outside of the low tax jurisdiction. 

Economic Substance Regulations

  • Objective is to avoid artificial/harmful “Profit Shifting” that is badly impacting the economy of Europe, America, India and many other countries where there is Corporate Tax.
  • Required reporting under the ESR is a means to monitor and achieve this goal, so just by opening a small company in UAE, companies can’t save tax.

The guideline apply to companies that carry out any of the following Relevant Activities.

 Relevant Activity:

  1. Banking Business
  2. Insurance Business
  3. Investment Fund Management Business
  4. Lease – Finance Business
  5. Headquarters Business
  6. Shipping Business
  7. Holding Company Business
  8. Intellectual Property Business
  9. Distribution and Services Business

 Exempt Companies: Any Company in which Federal Government or Government of either of the emirates holding 51% direct or indirect ownership.

Economic Substance Regulations in UAE Dubai

Failure to provide Notification on time or willfully provide inaccurate information.

Administrative penalty not less than AED 10,000 and not exceeding AED 50,000.

Failure to meet the Economic Substance Test (When Relevant Activity is Performed).

Administrative penalty not less than AED 10,000 and not exceeding AED 50,000.

Penalty of not less than AED 50,000 and not exceeding AED 300,000 for consecutive non-compliance.

Information exchange by UAE Ministry of Finance (MOF) with tax authorities of jurisdictions of direct parent company, ultimate parent company and/or ultimate beneficial owner.

ESR includes potential administrative action of license suspension in case of consecutive multiple failures of ES Test.

Sanctions under the ESR were introduced by UAE Cabinet of Ministers Resolution on ESR and further explained in.

Annual Notification & Economic Substance Report. What All Licensees must follow.

Annual Notification to Regulatory Authority – “with effect from 1 January 2020”.

  • Most UAE Free Zones apply 3 0 June 2020 as deadline
  • Financial years commencing on or from 1 January 2019
  • Notify whether any Relevant Activities are carried out during reportable period
  • If yes, indicate whether gross income in relation to Relevant Activity is subject to tax outside UAE
  • If IP Business, indicate if also High-Risk IP Business

Submission of Economic Substance Report within 12 months after FY-end 

  • Type(s) of Relevant Activity
  • Amount and type of income, OPEX and assets
  • Number of employees with qualifications
  • Information regarding CIGA’s performed
  • Declaration whether Economic Substance test is met
  • Further information in case of High-Risk Intellectual Property Business
  • Further information if Relevant Activity is outsourced

What Elevate Can do for you. 

Our professional Tax consultants will understand the structure of the group and do the assessment of requirements of the new Economic Substance. Team Elevate will help you to be compliant in UAE.

  • We can take care of the Annual Notification
  • Economic Substance Test (When Relevant Activity is Performed)
  • Economic Substance Report