Economic Substance Regulations UAE
As part of the UAE’s commitment as a member of the Organization for Economic Co-operation and Development (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 UAE issued Economic Substance Regulations. The objective is to avoid harmful tax practices and to prevent such low-tax jurisdictions from attracting profits from certain mobile activities without corresponding economic activity.
The Economic Substance Regulations require UAE onshore and free zone companies and certain other business forms that carry out certain activities to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake. The purpose of the Regulations is to ensure that UAE entities report actual profits that are commensurate with the economic activity undertaken within the UAE.
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Resolution 57 and Ministerial Decision 100 (collectively, the “Regulations”) issued by the Ministry of Finance (MOF) United Arab Emirates to regulate the Economic substance have been prepared in consultation with the Organization for Economic Cooperation & Development (‘OECD’) and the European Union (‘EU’).
Economic Substance Regulations Published in UAE
Applicability of ESR
The ESR Regulations apply to companies, partnerships, and other business forms (Licensee) registered in the UAE, including a Free Zone and Financial Free Zone, which carry out any Relevant Activity. UAE businesses are expected to use a substance over form approach to determine whether they undertake a Relevant Activity and, as a result, are within the scope of the ESR Regulations. This determination would require the UAE business to look beyond what is stated on their commercial license to the activities undertaken during a financial period.
If a business is unable to determine whether it conducts a Relevant Activity, it should seek professional advice.
What are the Relevant Activities under Economic Substance Regulations UAE?
Financial period
A Licensee’s financial period should correspond to the period for which financial statements (if any) are prepared to. Newly incorporated Licensees may have either a short or long first financial period.
Reportable period
A Licensee’s Reportable Period is the accounting period commencing on or after 1 January 2019 for which the Notification is filed. The end of the Reportable Period should correspond to the end of the period that financial statements (if any) are prepared. The Reportable Period is always the financial period preceding the financial period in which the Notification is required to be submitted.
Illustrations
A Licensee has a financial year that corresponds to the Gregorian calendar year:
Start date: 1 January 2019 End date: 31 December 2019
A Licensee is incorporated on 1 October 2019 and has a 31 March 2020 financial year end (short period of account):
Start date: 1 October 2019 End date: 31 March 2020
A Licensee is incorporated on 1 January 2019 and has a 31 March 2020 financial year end (long period of account):
Start date: 1 January 2019 End date: 31 March 2020 Following the first long period of account, the
Licensee’s subsequent Notification would cover the following Reportable Period:
Start date: 1 April 2020 End date: 31 March 2021.
A Licensee incorporated on 1 July 2018 with a 30 June 2019 financial year end would not be required to submit a Notification for this period, as the Regulations apply to financial years commencing on / or after 1 January 2019. The first reportable period for such Licensee would be: Start date: 1 July 2019 End date: 30 June 2020
Frequency
The ESR compliance requirements are to be fulfilled every year. Licensee must assess whether it is subject to the Regulations on a year-on-year basis and is solely responsible for undertaking the necessary filings through the Economic Substance Portal.
Timeline of submission
Licensees that undertake a Relevant Activity are required to file an annual Notification within six months from the end of the relevant financial period. In addition, Licensees that earn income from their Relevant Activity(ies) are also required to file an Economic Substance Report within 12 months from the end of the relevant financial period.
| Financial Year End | Notification Deadline (6 months) | Reporting Deadline (12 months) |
| 31-Mar-21 | 30-Sep-21 | 31-Mar-22 |
| 30-Jun-21 | 31-Dec-21 | 30-Jun-22 |
| 30-Sep-21 | 31-Mar-22 | 30-Sep-22 |
| 31-Dec-21 | 30-Jun-22 | 31-Dec-22 |
Professional Advice
As per the ministerial decision no. 100 for the year 2020 on the issuance of directives for the implementation of the provisions of the cabinet decision no 57 of 2020 concerning economic substance requirements if a business is unable to determine whether it conducts a relevant activity, it should seek professional advice.
How does HLB HAMT assist in Economic Substance Regulation in the UAE?
- Reassessing the status of the business under the ESR framework and its activity.
- Submitting notification with the Ministry of Finance.
- Tailor-made advisory service on formulating substance, testing your activities, ESR documentation, GAP analysis, etc.
- Preparing and submitting the ESR Report with the Ministry of Finance.
- Reviewing and submitting appeals for a penalty.
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