Important update
On October 2, 2024, the government of the United Arab Emirates made significant changes to the Economic Substance Regulations (ESR) through Cabinet Decision No. 98 of 2024.
These changes apply to accounting periods ending on or before December 31, 2022.
Companies whose accounting periods begin on or after January 1, 2023, are no longer required to submit an economic substance notification and/or report in the UAE.
Published in the Official Gazette on September 16, 2024, Cabinet Decision No. 98 of 2024 amends Cabinet Resolution No. 57 of 2020 concerning economic substance requirements by adding Article (2) B to limit its general application to fiscal years between January 1, 2019, and December 31, 2022.
However, to benefit from tax treaty provisions, companies will still need to demonstrate that they have adequate substance in the UAE and will need to report this in their corporate income tax return submitted through EmaraTax.
What does this mean for your company?
End of ESR obligations after 2022
If you were previously required to comply with the economic substance regulations, you are no longer required to meet these requirements for fiscal years ending after December 31, 2022.
Applicable fines
Penalties imposed under Cabinet Decision No. 57 for financial years ending after December 31, 2022, will be canceled. Any penalty already paid in relation to a year ending after that date will be refunded.
Understand the former ESR framework
The UAE introduced economic substance regulations, like other so-called “preferential tax jurisdictions” such as the BVI, Seychelles, Bahamas, or Jersey. These regulations applied from 2020.
For tax years between January 1, 2019, and December 31, 2022, a company concerned had to determine whether it fell within the scope of the ESR law and whether it had adequate substance in the UAE.
Who was affected?
A UAE company deriving income from one or more of the following sectors had to determine whether it had “adequate substance” in the UAE:
Banking, Insurance, Fund management, Finance and leasing, Pure equity holding company, Shipping, Headquartering, Intellectual property holding, Distribution and Service centre business.
Relations with a company in the same group
The definition of “Distribution and Service Centre Business” covered, among other things, purchasing components, materials, or goods from a Foreign Connected Person for resale, as well as providing services to Foreign Connected Persons.
A Connected Person is an entity that is part of the same group as the Licensee or Exempted Licensee. A “Group” consists of two or more entities linked by ownership or control in such a way that they are required to prepare consolidated accounts.
In practice, if a company in the United Arab Emirates invoiced a company in the same group for services or goods, it could fall within the scope of the ESR regulations.
What is an adequate substance?
A relevant company had to be directed and managed in the United Arab Emirates. This could notably mean having a manager resident in the United Arab Emirates and/or holding the minutes of general meetings or board meetings in the United Arab Emirates.
It also had to have an adequate number of qualified employees, a physical presence, and expenses proportionate to the level of activity carried out in the United Arab Emirates.
The 3 stages of ESR regulations
Step 1 - Determine whether the company was affected
Determine whether the company's activities fell within one of the sectors covered by ESR regulations.
This first step made it possible to determine whether the ESR notification had to be completed, usually before 30/06 each year. If a company did not fall within the scope of the ESR law, completing the notification was not required.
Step 2 - Verify substance in the United Arab Emirates
If the company did not have adequate substance, it was required to establish a presence consistent with its income-generating activity.
This could include: renting an office in the Emirates, hiring staff locally, having a resident manager and/or employees, keeping and archiving shareholders’ meeting minutes in the Emirates with the shareholders/managers present on the day they were held, and incurring expenses consistent with the activity.
Step 3 - Share the report
Before 31 December each year, a report had to be submitted to the UAE Ministry of Finance (MOF), indicating the economic substance established for the company or the outsourcing used to meet the requirements.
This report could be provided to a foreign tax authority upon request. It was systematically provided if the economic substance requirements were not met in the UAE.
Sanctions and solutions
Up to AED 50,000
In the event of non-compliance, a fine of up to AED 50,000 could be imposed in the first year.
Up to AED 300,000
The following year, the fine could reach AED 300,000. The authorities could also forward the report to the relevant foreign tax administrations.
Re-domiciliation possible
When a company located in another jurisdiction could not establish sufficient substance (BVI, Seychelles, Bahamas, Jersey, etc.), redomiciliation to the United Arab Emirates could be considered.
This solution ensured the continuity of the company - signed contracts, bank accounts, etc. - while enabling it to demonstrate substance in the United Arab Emirates.
How can I get assistance regarding the ESR?
For our clients, we conduct a preliminary assessment free of charge. If your case is straightforward, we will let you know whether or not your company falls within the scope of this law.
In more complicated cases, if you wish to engage the assistance of a Tax agent, the costs are as follows:
- Determine whether or not your company is subject to this regulation: AED 1500.
- Complete the notification for you: AED 1000.
- Preparation of the economic substance report: quotation provided based on the complexity of your company.