ESR (Economic Substance Regulations)

Economic Substance Regulations (ESR) in UAE

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 UAE issued Economic Substance Regulations (ESR) (Cabinet of Ministers Resolution No. 31 of 2019), (the “Regulations”) on 30 April 2019. Guidance on the application of the Regulations was issued on 11 September 2019 (Ministerial Decision No. 215 of 2019), and Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies lists the Regulatory Authorities tasked with the administration and enforcement of the Regulations. Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020 and an updated Guidance was issued on 19 August 2020 (Ministerial Decision No. (100) of 2020).

The Economic Substance Regulations in Dubai and the UAE require onshore and free zone companies and certain other business forms that carry out any of the defined “Relevant Activities” listed below to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (“Economic Substance Test”).

Relevant Activities:

• Banking Business
• Insurance Business
• Investment Fund Management Business
• Lease – Finance Business
• Headquarters Business​​
• Shipping Business
• Holding Company Business
• Intellectual property Business (“IP”)
• Distribution and Service Centre Business​

The Economic Substance Regulations in UAE apply to financial years commencing on or from 1 January 2019. Entities that are within the scope of the Regulations are required to submit an annual Notification form to their Regulatory Authority and complete and submit to the same Regulatory Authority an Economic Substance Report within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019). An entity is not required to meet the Economic Substance Test and file an Economic Substance Report for any financial period in which it has not earned income from a Relevant Activity or if it meets the conditions for being exempt. A Notification form will need to be submitted regardless.

Failure to comply with the Economic Substance Regulations can result in penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), as well as other administrative sanctions such as the suspension, revocation, or non-renewal of the entity’s trade license or permit.

On 10 August 2020, the Cabinet of Ministers issued Resolution No. 57 of 2020 Concerning Economic Substance Regulations. The purpose of the ESR is to ensure that UAE entities report actual profits that are commensurate with the economic activity undertaken within the UAE. These regulations apply to all Free Zones and Mainland Companies in Dubai and across the UAE.

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