Economic Substance Regulations (ESR)

ESR UAE Overview

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The UAE issued the Economic Substance Regulations (“ESR”) as part of the UAE’s commitment as a member of the 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. ‍The purpose of the Regulations is to prevent harmful tax practices and to ensure that UAE entities have sufficient economic activity undertaken within the UAE that is commensurate with the actual profits reported in the UAE.

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Governing Regulations

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The Regulations were introduced in April 2019 with Cabinet of Ministers Resolution No. 31 of 2019 and Guidance on the application of the Regulations was issued in September 2019 with Ministerial Decision No. 215 of 2019.

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In August 2020, amendments to the Regulations were made by the issuance of Cabinet of Ministers Resolution No. 57 of 2020, and updated Guidance was issued with Ministerial Decision No. 100 of 2020.

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National Assessing Authority

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The Federal Tax Authority (FTA) shall carry out the functions:

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1. Undertake assessments to determine whether a Licensee or an Exempted Licensee has met the Economic Substance Test

2. Impose the administrative penalties in case of the following:

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• for failure to provide a Notification 
• for failure to submit an Economic Substance Report 
• for failure to meet the Economic Substance Test 
• for providing inaccurate information

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3. Hear and decide on appeals against Administrative Penalty

4. Carry out the reporting requirements set out under Article 10 (Provision of Information by the National Assessing Authority) of this Resolution

5. Exercise any other powers or functions as required to implement this Resolution; and

6. Exercise any other powers or functions as may be required to implement any decision of the Competent

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Effective Date

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The Regulations apply to financial years commencing on or from 1 January 2019.

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Licensee

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A licensee can be any of the following:

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1. A juridical person
2. An unincorporated partnership that is registered in the UAE and/or undertakes a Relevant Activity

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Exempted Licensee

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1. Non-UAE tax resident entities
2. Investment funds and their underlying special purpose vehicles (SPVs) / Investment holding entities
3. Wholly UAE resident owned UAE entities with domestic transactions only (that are not part of a multinational group)
4. UAE branches of foreign companies that are subject to tax on all their Relevant Income in a foreign jurisdiction

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Relevant Activity

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The following activities are defined as a relevant activity as per the ESR legislation:

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1. Banking Business
2. Insurance Business
3. Investment Fund Management Business
4. Lease-Finance Business
5. Headquarters Business
6. Shipping Business
7. Holding Company Business
8. Intellectual Property Business
9. Distribution and Service Centre Business

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No Relevant Income

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A Licensee is not required to meet the Economic Substance Test in a Financial Year in which it has no

Relevant Income.

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Penalties for Non-compliance

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Penalties for non-compliance of the ESR rules are as follows:

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