An Overview of BEPS and Economic Substance Regulation in UAE

Jayashree GirisanJayashree Girisan    18 June 2020
An Overview of BEPS and Economic Substance Regulation in UAE

The Ministry of Finance, UAE has introduced the Economic Substance Regulation (ESR) effective 2019. This is in response to UAEs commitment to its membership to the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on BEPS.

Base Erosion and Profit Shifting (BEPS) refers to the tax planning strategies used by multinational enterprises. These tax planning strategies effectively reduce the tax base in higher tax jurisdictions and shifts them to lower tax jurisdictions. Such a shift reduces the amount of profits in the place where their income is earned. The Organisation for Economic Co-operation and Development (OECD) defines BEPS strategies as “exploiting gaps and mismatches in tax rules”.

As per OECD, BEPS practises cost countries $ 100-240Bn in lost revenue annually. Over 135 countries and jurisdictions are under the OECD/G20 Inclusive Framework and are collaborating on the implementation of 15 Actions that will help tackle the uneven international tax practices, bring transparency in the tax environment and address tax avoidance.

UAE has introduced the ESR towards its commitment to implementing the following four actions under BEPS minimum standards:

  • Action 5:Countering Harmful Tax Practices, taking into account transparency and substance
  • Action 6: Preventing the granting of Treaty benefits in Inappropriate circumstances
  • Action 13:Transfer Pricing Documentation and Country by Country Reporting
  • Action 14:Dispute Resolution

Economic Substance Regulations, UAE

The Economic Substance Regulations in UAE apply to financial years commencing on or from 1 January 2019. Businesses are expected to file an ESR notification with the Regulatory Authorities as per the timelines advised by the respective Regulatory Authorities. This will be an annual notification.

Apart from the ESR annual notification, businesses that have a relevant activity as per the Regulations are expected to review their operations for income generated through such relevant activity in the respective financial year. A licensee that is carrying on a Relevant Activity from which they earn income during a financial period, will be further required to provide the following no later than twelve months after the last day of each financial period:

  1. Satisfy the Economic Substance Test
  2. File an annual Economic Substance Return in respect of the financial period

Economic Substance Test requires that :

  • The Licensee carries out Core Income Generating Activity in the UAE
  • The License is directed and managed in UAE with regard to the relevant activity
  • There is adequate resources in relation to the relevant activity and whose expenditure is in the state.

With the introduction of the ESR, businesses in UAE need to review their operations in light of the  existence of adequate economic substance.


Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax. 

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