Economic Substance Regulation

Economic Substance Regulation (ESR) was initially introduced by the UAE government in 2019, to align the entire region with global standards in the prevention of Base Erosion and Profit/Income Shifting (BEPS).

The United Arab Emirates Cabinet had issued the Cabinet of Ministers Resolution No.31 of 2019, where it states that all in-scope UAE entities carrying on Relevant Activities need to maintain an economic substance. This has been applied in all jurisdictions of the UAE, including all the free zones and financial free zones. This was followed by the Ministerial Decision 215 for 2019, which gave directives for the implementation of the provisions of Cabinet Decision no. 31/2019. On 10th August 2020, a New Economic Substance Regulation was introduced in the UAE via Cabinet Resolution 57/2020, which repealed and revoked Cabinet Resolution 31/2019 and Ministerial Decision 100 for 2020 was issued to give directives for the implementation of the provisions of Cabinet Decision no. 57/2020.

The Economic Substance Regulation is applicable to those entities carrying the following Relevant Activities:

Banking
Insurance
Investment Fund Management
Lease-Finance
Shipping
Headquaters
Intellectual Property
Holding Company
Distribution & Service Centre

There are also a few Exempted Licensee as specified in the Cabinet Resolution of 57/2020 and the following entities fall under this category:

An Investment Fund
A licensee that is Tax Resident in a Jurisdiction other than in the UAE
A licensee that is wholly owned by one or more UAE Resident and meets the following conditions:
• An entity should not be part of MNE Group
• An entity should carry business only in the UAE
A licensee that is the branch of a foreign entity the Relevant Income of which is subject to tax in a jurisdiction other than UAE

If the business meets the following conditions in the UAE Economic Test, the ESR applies to the entity:

The UAE licensee conducts or performs a Core Income/Profit Generating Activity (CIGA) in UAE
The business is managed and directed in the country in relation to that activity
The business has a sufficient number of full-time employees or they incur significant amount on operating expenditure or by outsourcing CIGA to a third-party service provider in UAE, or if there are sufficient physical assets

It is important to assess whether the entity is engaged in any of the listed relevant activities to ensure that they comply with the Economic Substance Regulations in UAE. Since this regulation was recently issued by the UAE government, many businesses have no idea what steps they will have to take to ensure compliance. This is where SM JOSHI Chartered Accountants comes to the picture.

Our team at SM JOSHI Chartered Accountants are well versed with the Economic Substance Regulations in UAE and have done thorough research on its policies and requirements. If the regulation is applicable for your company, then our team of consultants can assess your entity to identify if all the regulations are being complied with and the criteria on the satisfaction are met or not. And, if your company does not meet all the criteria, we will identify the issue and provide recommendations on how you can ensure the compliance of Economic Substance Regulation in your entity. We provide a range of ESR services, including: