In April 2019 the UAE introduced Economic Substance Regulations (ESR) under Cabinet Resolution No. 31 of 2019. They require companies carrying out certain activities to show that they have real economic substance in the UAE, rather than simply being registered here. The rules apply to financial years starting on or after 1 January 2019.
Who is affected
The regulations apply to UAE onshore and free zone entities that carry out one or more relevant activities:
- banking;
- insurance;
- investment fund management;
- lease-finance;
- headquarters business;
- shipping;
- holding company business;
- intellectual property business; and
- distribution and service centre business.
The economic substance test
An entity carrying out a relevant activity must show that:
- its core income-generating activities are carried out in the UAE;
- it is directed and managed in the UAE in relation to that activity; and
- it has an adequate number of qualified employees, physical assets and operating expenditure in the UAE, relative to its activity.
Lighter requirements apply to pure equity holding companies.
What must be filed
Entities carrying out a relevant activity need to file a notification with their regulatory authority and, for each financial year, an economic substance report showing how they meet the test. Penalties apply for failing to file or failing to meet the requirements.
What to do now
- Review your activities against the list of relevant activities. The definitions are specific, and the name of your licence activity is not always decisive.
- Assess your substance. Where are decisions made? Who carries out the core activities? Are the staff, premises and spending in the UAE?
- Keep evidence of board meetings, decision-making and activities carried out in the UAE.
The regulations are new and guidance is still developing, so it is worth reviewing your position early. We can help you assess whether the rules apply and what you need to file.
This article is general information based on the rules as we understand them at the date of publication. It is not advice on your circumstances. Laws and practice change, so please speak to us before acting on it.
