In response to the UAE being placed on the EU list of non-cooperative tax nations, the UAE enacted the Economic Substance Regulations (ESR) on 30th April 2019 which requires all entities that undertake Relevant Activities to have a substantial presence in the jurisdiction. The enactment is intended to align the UAE with the global standards developed by the OECD and the EU to curb harmful tax practices.
The UAE’s aim is to ensure that entities that undertake certain Relevant Activities are not used to artificially “attract or shift profits” and that they are proportionate to the activity undertaken.
The activities captured under the regulations are:
Banking activities
Insurance activities
Investment Fund Management activities
Lease-Finance activities
Shipping activities
IHolding Company activities
Intellectual Property activities
Headquarter activities
• To meet the ESR test, entities must demonstrate, inter alia, the below ESR requirements;
• It conducts its Core Income Generating Activities (CIGA) in the UAE. (Article 5 of the Cabinet of Ministers Resolution No.31 of 2019);
• It is managed and directed in the UAE with regard to its CIGA
• It possesses an adequate number of qualified full-time employees in relation to its activity and who are physically present in the UAE, or that sufficient expenditure is incurred in out-sourcing to third parties in the UAE whose activities, employees, expenditure and premises are adequate for carrying out the Relevant Activity being outsourced in the UAE;
• It incurs adequate operation expenditure in the UAE or that adequate expenditure is incurred in outsourcing to third parties in the UAE who meet the economic substance requirements of the UAE; and
• It has adequate physical assets or levels of expenditure on outsourcing third parties in relation to the CIGA in the UAE.
Below are the steps that must be undertaken as soon as possible:
• Assess whether that your company is a reporting entity.
• All entities must file a Notification to the Relevant Authority by specified date of their assessment.
• If a reporting entity, then they must prepare a report (a format to be prescribed in due course) and file within 12 months of its financial year end.
What are the Penalties for non-compliance?
Failure to follow the above compliance requirement may incur administrative penalty between the ranges of AED 10,000 to AED 300,000.
Black Stone Tax Consultancy will assess the business activities of your company to determine whether the activities are Relevant Activity under Economic Substance Regulation and assist in the Preparation, Review and Filing of the ESR Notification Form and ESR Reports with the Relevant Authority.
