Introduction
ESR compliance in the UAE is set to improve the functioning of the UAE globally.
Economic Substance Regulations (ESR) in the United Arab Emirates (UAE) were introduced to ensure that businesses in the UAE engaging in certain activities have substantial economic activities within the country and are not just taking advantage of the UAE’s favorable tax regime. These regulations align with the global standards set by the OECD (Organisation for Economic Co-operation and Development) and the EU to prevent harmful tax practices and to promote tax transparency.
The Relevant Activities of ESR in the UAE
The ESR in the UAE specify certain “Relevant Activities” that are subject to these regulations. Entities engaged in these activities must meet the economic substance requirements, which include conducting core income-generating activities (CIGAs) in the UAE, being directed and managed in the UAE, and having adequate substance in terms of employees, physical assets, and expenditure:
Banking Business: Accepting deposits of money which can be withdrawn or repaid on demand or after a fixed period, and using such deposits to make loans, advances, or investments.
CIGAs comprise raising funds, managing risk, taking hedging positions, providing loans and credits, and managing regulatory capital.
Insurance Business: Effecting or carrying out contracts of insurance, including reinsurance.
CIGAs comprise predicting and calculating risk, insuring or re-insuring against risk, providing insurance business services to clients.
Investment Fund Management Business: Providing discretionary investment management services to a collective investment scheme.
CIGAs comprise taking decisions on the holding and selling of investments, calculating risk and reserves, managing regulatory capital, preparing reports to investors or government authorities.
Lease-Finance Business: Providing credit or financing for any kind of consideration.
CIGAs comprise agreeing funding terms, identifying and acquiring assets to be leased, setting leasing terms and duration, monitoring and revising leasing agreements, managing leased assets.
Headquarters Business: Providing important management or support services to other group entities.
CIGAs comprise taking relevant management decisions, incurring operating expenditures on behalf of group entities, coordinating group activities.
Shipping Business: Managing the operation of ships in international traffic for the transport of passengers, cargo, or both.
CIGAs comprise managing crew (including hiring, paying, and overseeing crew members), overhauling and maintaining ships, overseeing voyages, ensuring ship safety.
Holding Company Business: Holding only equity interests in other entities and earning dividends and capital gains from such holdings.
CIGAs comprise complying with corporate law and regulations, having adequate employees and premises for holding and managing equity participations.
**The requirements for holding companies are less stringent compared to other relevant activities.
Intellectual Property (IP) Business: Holding, exploiting, or receiving income from intellectual property assets.
CIGAs comprise conducting R&D activities leading to intellectual property, creating and exploiting intellectual property, managing and enhancing the value of intellectual property.
Distribution and Service Center Business: Purchasing raw materials or finished products from other group entities and distributing them, and/or providing services to other group entities.
CIGAs comprise transporting and storing goods, managing inventories, taking orders, providing consulting or administrative services.
Economic Substance Tests
Entities engaged in relevant activities must meet the economic substance test, which includes:
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- Conducting core income-generating activities (CIGAs) in the UAE.
- Being directed and managed in the UAE in relation to these activities.
- Having an adequate level of qualified full-time employees, physical presence, and operating expenditure in the UAE relative to the activities conducted.
Compliance Requirements
Entities engaged in these relevant activities need to:
File an annual notification: Inform the regulatory authority about the nature of their business and whether they conduct any relevant activities.
Submit an economic substance report: Demonstrate compliance with the economic substance test by detailing their CIGAs, management activities, physical presence, and expenditure in the UAE.
Exemptions and Penalties when addressing ESR in the UAE
Some entities may be exempt from these regulations, particularly if they are:
- 51% or more owned by the UAE government.
- Tax resident in another jurisdiction (with proof).
- Branches of foreign companies where the relevant income is subject to tax in the foreign jurisdiction.
Non-compliance with the ESR can result in financial penalties, exchange of information with foreign tax authorities, and other administrative actions.
The aim of these regulations is to ensure that entities carrying out relevant activities in the UAE have substantial economic presence and contribute to the local economy, thereby aligning with international tax standards and preventing harmful tax practices.
Conclusion to ESR Compliance in the UAE
The introduction of ESR in the UAE is part of the country’s commitment to international standards on tax transparency and to avoid being listed as a non-cooperative jurisdiction for tax purposes by the OECD and the EU. By ensuring that entities have substantial economic activities in the UAE, the regulations aim to enhance the country’s reputation as a responsible and transparent jurisdiction for international business.
Entities operating in the UAE need to carefully assess their activities, ensure compliance with the ESR, and maintain proper documentation to demonstrate their adherence to the regulations. This involves a comprehensive understanding of the relevant activities and the specific requirements of the economic substance test.
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We hope this publication will help you understand the concept of ESR in the UAE and remain available for any questions regarding this post of general application.
For more information published in English you can visit all our publications at this link as well as the videos in English of our Partner Maria Rubert.
*The information on this page is not intended to be legal advice. This article is intended to provide an initial introduction to the concept of ESR in the UAE.