As a member of the Organisation for Economic Cooperation & Development “OECD” Inclusive Framework, the United Arab Emirates issued the Economic Substance Regulations in 2019 which require UAE entities to maintain an adequate “economic presence” in the UAE relative to the activities they undertake.
Economic Substance Regulations (ESR) apply to entities and unincorporated partnerships registered by a competent authority in the UAE, that carry out one or more relevant activities as defined under ESR across the UAE, including Free Zones and Financial Free Zone, also referred to as Licensees.
The ESR requires Licensees to demonstrate their genuine economic presence in the UAE. Licensees may be required to prepare and submit an economic substance notification and an economic substance report on an annual basis when they conduct any of the Relevant Activities.
What are the Relevant Activities?
- Banking business.
- Insurance business.
- Investment fund management business.
- Lease-finance business.
- Headquarter business.
- Shipping business.
- Holding company business.
- Intellectual property business.
- Distribution and service center business.
Economic Substance Regulations requirements
Entities are expected to use a ‘substance over form’ approach to determine whether or not they undertake a Relevant Activity, irrespective of its mention on the licensee’s trade license.
Entities that are engaged in one or more of the relevant activities in the UAE during the relevant financial year, are required to submit annual economic substance notifications and reports to the regulatory authority.
These entities must submit economic substance notification within 6 months from the end of the fiscal year, indicating whether they carry out a Relevant Activity in the financial year and whether any income is generated from that Relevant Activity. Additionally, they need to disclose if the income from the relevant activity has been subjected to taxation outside the UAE.
The information provided as part of the Notification is a prerequisite to filing an Economic Substance Report. The Economic Substance Report must be submitted within 12 months from the end of the fiscal year, indicating whether they met the economic substance requirements, with information about the Relevant Activity income earned, the number and qualifications of the staff involved, and information about the premises and other assets used in conducting the Relevant Activity.
UAE entities will need to do qualitative and quantitative assessments for whether and which of their activities fall within the scope of the economic substance regulations.
UAE entities that qualify for an exemption from the Regulations are also required to submit a notification.
Exempted entities under ESR in the UAE
The following categories of entities are exempt from filing an ESR Report, but still need to file a Notification:
- Entities 100% owned by UAE nationals or UAE resident individuals, which are not part of a multinational enterprise group and operate solely within the UAE.
- Investment funds.
- Entities that are tax resident in a jurisdiction outside the UAE
- Branches of a foreign company where the income of the branch is subject to tax in the jurisdiction of the parent company.
What is the importance of the Economic Substance Regulations (ESR) for businesses?
By introducing the ESR the UAE aims to comply with international standards. Being a member of the Organisation for Economic Cooperation & Development “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, adhering to these regulations demonstrates the UAE’s commitment to transparency and combating harmful tax practices.
ESR ensures that companies conducting business in the UAE have a substantial presence and contribute to the local economy. This prevents unfair advantages for entities that might otherwise try to minimize their tax liabilities without a genuine economic activity in the country.
Commitment to global standards helps in maintaining the UAE’s reputation as a reliable and transparent business hub. This, in turn, attracts more international investments and fosters confidence among businesses operating within the UAE.
Compliance with ESR regulations is a legal requirement. Non-compliance can result in penalties such as fines, suspension, or revocation of business licenses, which can significantly impact the operations and reputation of a company.
How SPC Free Zone can help you?
SPC offers a fast and easy Sharjah freezone business setup in the UAE. As one of the most centrally located and easily accessible free zones in the region, it’s the ideal ecosystem to start and grow your business successfully with our competitive business setup packages. We help entrepreneurs obtain relevant business licenses and visas for the free zone. With SPC Free Zone, you can also take advantage of up to 20 visa quotas and maximize profits with zero paid-up share capital and 100% foreign ownership.
SPC Free Zone also provides an e-commerce and general trading license for all commercial activities. We aim to give business owners the tools and knowledge they need to navigate their way. Contact us today!
