Economic Substance Regulations (ESR) UAE - Key update!

Pratik ShahPratik Shah    10 September 2020
Economic Substance Regulations (ESR) UAE - Key update!

On 10 August 2020, the UAE Cabinet of Ministers issued Cabinet Resolution No. 57 (2020) which supersedes Cabinet Resolution No. 31 (2019). The need for guidance and clearer directions to the Licensees operating in the UAE perhaps paved the way for refining the regulations for the businesses carrying out one or more relevant activities.  

Whilst the erstwhile regulations were more general and covered “a natural or juridical person licensed by the competent licensing authority/ authorities in the State to carry out a Relevant Activity in the State, including a Free Zone and a Financial Free Zone”, the key amendments in the ESR covers juridical persons or unincorporated partnerships, while ‘natural persons’ possibly including sole proprietors, trusts and foundations are now excluded from filing notification as well as meeting the Economic Substance test.

Exemption include the following (subject to filing of notification and documentary evidence):

  • Entities that are tax resident outside the UAE, 
  • Investment Funds, 
  • Entities wholly owned by UAE residents and are not part of an MNC group and only have business in the UAE,
  • UAE branches of foreign parent whose income is subject to tax in the home country

Exemption for entities directly/indirectly owned at least 51% by the UAE Government stands withdrawn under the new regulations unless they fall under the above mentioned newly introduced regulations.

While changes to the definition of certain Relevant Activities and increase in the monetary penalties for non-compliance have been made, it is pertinent to note that the UAE Federal Tax Authority shall now be responsible for assessing and enforcing compliance with Economic Substance test.

Certainly, as the new guidance provide additional clarity, the businesses in the UAE welcome these changes as it should help reducing administrative burden at the same time enhancing transparency in justified business operations. 

The views expressed above are personal.

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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