What are the highlights and scope of UAE Economic Substance Regulation?

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The economic substance regulation in the United Arab Emirates is one of the requirements which requires compliance of the entities which have been registered in the United Arab Emirates. It was brought into effect by resolution no—31/2019 on April 30, 2019, by the cabinet of United Arab Emirates Ministry.

The rules laid down in the Economic Substance Regulations of UAE by the Cabinet of Ministers Resolution No. 31 of 2019, are similar to the regulations introduced by other countries which have a similar tax environment of no or only nominal tax.

These countries follow the guidance and the frameworks issued and the global standard developed by the European Union (EU) and Organisation for Economic Co-operation and Development (OECD)

The highlights of the Economic Substance Regulation in the UAE are as follows: 

Article 1

 In article 1 of the resolution, the definition, and the way of implementation of the resolution of ESR have been mentioned.

In the resolution passed by the cabinet ministers, a licensee is described as a person who is juridical and is licensed by the authorities who are either authorities in the state or the competing licensing authorities, to carry out an activity that is considered relevant.

Article 2

This article explains the criteria which help in determining whether the activity carried out by the licensee is achieving the economic interest of the state or not. The article also has the prerequisitess laid down to determine this criterion.  

Article 3 

This article establishes the scope of application of the resolution of the Economic Substance Regulation.

Article 4 and Article 5 

These two articles from the Cabinet of Ministers Resolution explain the relevant activities and about the regulatory authorities. They also specify the activities which can be considered as the state’s core income-generating activities and which activities cannot be considered.

Article 6

This article clarifies the requirements to be met in order to meet the criteria of the economic substance test.

Article 7

This article describes the norms for assessing and identifying whether a licensee has fulfilled an economic substance test or not.

Article 8 

This article explains the requirements to provide information.

 Article 9 

This article of the Cabinet of Ministers Resolution explains about the identification of the process of exchanging information which has been submitted by a licensee. This should be provided to the competent authorities by the regulatory bodies.

Articles 10 and 11

These two articles of the resolution provide the details of the offences and penalties of the cases where the Economic Substance Test is not met or what charges can be levied or actions can be taken for failing to provide the information, or, for providing any kind inaccurate or misleading information. 

Articles 12, 13, and 14 

These three articles of the resolution explain how to identify the following:

  • the period for the imposition of penalties
  • the right to appeal against administrative penalties
  • and the date of payment of the administrative penalties. 

Article 15 

In this article, the powers of the regulatory authorities have been described. It is mentioned that the regulatory authorities have the power to enter any business premises and conduct an examination of its documents. This is also valid without giving any prior notice to the business owners.

Article 16 

In this article, it is mentioned that it will lead to the annulment of any provisions which contradict the provisions laid down and established by the economic substance regulation or creates conflicts with them in anyways.

Articles 17 and 18 

In these two articles, it is mentioned that the cabinet of ministers or any delegated authorities has the right to issue one or more decisions to implement any provision of the economic substance regulation. This right will also come into force from the date of issuance of the economic substance regulation.

These were the key highlights of the resolution as laid in the Economic substance regulation of the United Arab Emirates. 

Scope of the regulations

All the free zone and onshore companies of the United Arab Emirates are subjected to the provisions and regulations mentioned in the ESR provided they carry out activities which are identified as “relevant activities”.  Also, some companies or entities can be excluded from the resolution. These include the entities that are directly or indirectly owned by the United Arab Emirates government, which includes both federal and local government bodies.

The regulatory authorities assigned to each of the activities categorised as “relevant” were prescribed the entities which covered all the economic departments considering all the areas in the mainland as well as all in the free zone licensing authorities for companies registered with them. After this, there was a workshop held by the ministry of finance which was aimed to guide the authorities about the processes. Following this, each regulatory body was advised to inform the entities registered under them about the regulations and how to comply with them. 

The notification along with the Economic Substance Regulation report has to be submitted to the relevant authorities within twelve months from the end of the financial years beginning after January 1, 2019. As a result, the companies will be required to fill the notification between January 1, 2020, and December 31, 2020.

If someone who is identified as a licensee does not carry out a relevant activity during a particular financial period, then there will be no need for him or her to notify any regulatory authorities. Also, for that financial period, they will not be required to submit an economic substance return.

These requirements regarding the substance and transparency have become a standard of almost the all the nations in the developing phase and especially in those who are a part of the Organisation for Economic Co-operation and Development (OECD)  and its inclusive framework just like the United Arab Emirates. 

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