What are Economic Substance Regulations and their Importance?

Overview of Economic Substance Regulations (ESR) introduced in the UAE:

The UAE issued Economic Substance Regulations on 30th April 2019. These Regulations require UAE onshore companies, free zone companies, and certain other business forms that perform any of the listed relevant activities to maintain and show an adequate economic presence in the UAE.

Relevant Activities Subject to the Regulations:

  • Banking Business
  • Insurance Business
  • Investment Fund Management Business
  • Lease & Finance Business
  • Headquarters Business​​
  • Shipping Business
  • Holding Company Business 
  • Intellectual Property (IP) Business
  • Distribution & Service Centre Business​

Regulatory Authorities for ESR:

  • Federal Entities:

    • Ministry of Economy
    • Central Bank
    • Insurance Authority
    • Security and Commodities Authority

  • Free Zone Authorities in:

    • Abu Dhabi
    • Dubai
    • Sharjah
    • Ajman
    • Ras Al-Khaimah
    • Umm Al-Quwain
    • Fujairah

Role of Regulatory Authorities for ESR:

  • To monitor compliance with the requirements of filing the Notification Form and Economic Substance Report as per the Regulations
  • To identify possible Licensees
  • To validate information submitted by Licensees
  • To determine whether a relevant entity meets the conditions for exemption
  • To share collected information with the UAE Federal Tax Authority and the UAE Ministry of Finance

Definition of a Licensee under the Regulations:

A Licensee is a juridical person or an unincorporated partnership registered in the UAE which undertakes a Relevant Activity. These include:

  • A Limited Liability Company (LLC)
  • A Private Shareholding Company
  • A Public Shareholding Company
  • A Joint Venture Company (JV)
  • A Partnership

A natural person, a sole proprietorship, a Trust, or a Foundation is not considered a Licensee under the Regulations.

The National Assessing Authority under the Regulations:

As the National Assessing Authority under the Regulations, the Federal Tax Authority assesses and determines whether a Licensee has economic substance in the UAE or not.

Licensees Exempt from the Regulations:

The following Licensees are exempt from filing an Economic Substance Report and demonstrating substance in the UAE:

  • A tax resident outside the UAE
  • An investment fund and its underlying investment holding entities
  • A fully UAE resident-owned business that does not belong to a multinational group and operates business only in the UAE
  • A branch of a foreign entity that is liable for paying tax on all of its Relevant Income earned in a foreign jurisdiction

Licensees must submit sufficient evidence along with the Notification form to claim any of the above exemptions.

Other Facts About Economic Substance Regulations:

  • The Regulations apply to financial years starting on or after 1st January 2019.
  • Entities that are within the scope of the Regulations must submit the following to their Regulatory Authority:
    • An annual Notification form and
    • An Economic Substance Report within 12 months from the end of their financial year
  • An entity is not required to submit an Economic Substance Report for any financial period when it has not earned income from a Relevant Activity or meets the exemption conditions. However, it must submit the Notification form.

Penalties for Non-Compliance with the Regulations:

Non- compliance with the Regulations can result in:

  • Penalties
  • Spontaneous exchange of information with the Foreign Competent Authority
  • Other administrative sanctions, such as the suspension, revocation, or non-renewal of the trade license or permit issued to the entity

Importance of Economic Substance Regulations Introduced in the UAE

The UAE issued Economic Substance Regulations in April 2019 to honor its commitment as a member of the OECD Inclusive Framework. The issuance was also in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation.

The Regulations were introduced to ensure that UAE entities report actual profits related to the economic activity undertaken by them within the UAE.

If you are a Sharjah Media City (Shams) Free Zone entity keen to learn more about ESR compliances, then contact Shams authorities at 800 (Shams) 74267 now! For any other information, visit www.shams.ae today!


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