The United Arab Emirates (UAE) introduced a set of rules generally known as the Economic Substance Regulations (ESR) in 2019 to combat tax avoidance by multinational companies and increase transparency. The ESR applies to all mainland and free zone legal entities (Licensees) carrying on Relevant Activities (as listed below). This alert summarises the main ESR requirements and sets out a reminder of important deadlines.
Most notably, companies with a financial year ending on 31 December should be mindful of the fast approaching 30 June 2023 deadline for filing ESR notifications and those with a financial year ending on 30 June should consider whether they are required to file an ESR report by the same date.
Main ESR legislation
The ESR includes, in particular: (i) Cabinet Resolution No. 31 of 2019 on the Specification of the Requirements of the Real Economic Activities, (ii) Ministerial Decision No. 215 of 2019 on the Issuance of Directives for the Implementation of the Provisions of Cabinet Decision No. 31 of 2019, (iii) Cabinet of Ministers Resolution No. 57 of 2020 Determining the Economic Substance Requirements, and (iv) Ministerial Decision No. 100 of 2020 on the Issuance of Directives for the Implementation of the Provisions of Cabinet Decision No. 57 of 2020 Concerning Economic Substance Requirements.
What does the ESR require?
The ESR requires Licensees to demonstrate that they have a genuine economic presence in the UAE and that the activities they carry on are not solely tax-driven. Licensees may be required to prepare and submit an economic substance notification (Notification) and an economic substance report (Report) from 1 January 2020 onwards, on an annual basis (if applicable).
Economic Substance Test
Pursuant to the ESR, Licensees that carry on a Relevant Activity in the UAE that generates revenue/income (either a profit or a loss) must maintain an adequate presence in the UAE such as through having an adequate level of assets or number of qualified employees. In addition, the strategic management decisions of the Licensee must be conducted in the UAE. In other words, they must meet what is known as an “Economic Substance Test”. The level of economic substance a Licensee is required to demonstrate under the Economic Substance Test may depend on the type of Relevant Activity conducted by it in the UAE.