Base Erosion and Profit Shifting (BEPS) is a way used by the companies for artificially transferring profits from high tax jurisdictions to low or no tax heavens by adopting creative tax planning strategies. To tackle these harmful tax practices including unlawful avoidance or tax evasion, the Organization of Economic Cooperation and Development (OECD) came up with an action plan to tackle tax avoidance.
As a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union (“EU”) Code of Conduct Group on Business Taxation, the UAE introduced a Resolution on the Economic Substance (Cabinet of Ministers Resolution No.31 of 2019, the “Regulations”) on April 30, 2019. However, on August 10, 2020 new Economic Substance Regulations were introduced by way of Cabinet of Ministers Resolution No.57 of 2020 which replaced and revoked Resolution No.31.
Economic Substance Regulation applies to all Licensee & Exempted Licensee carrying on the Relevant Activities in the UAE, including the Free Zone or Financial Free Zone; with effect from the year 2019.
Article (1) of the ESR defines a Licensee as an entity, that is a juridical person (corporate legal entity with a separate legal person from its owners) and unincorporated partnership (partnerships operating in the UAE without having separate legal body), which carries on a Relevant Activity in the UAE.
Exempted Licensee as per Cabinet Resolution No.57/2020 means any of the following:
Investment funds
A Licensee that is Tax Resident in a Jurisdiction other than in the UAE
A Licensee that is fully owned by one or more UAE Resident and meets the following conditions:
a) An entity should not be part of the MNE Group
b) An entity should carry business only in the UAEA Licensee that is the branch of a foreign entity the Relevant Income of which is subject to tax in a jurisdiction other than UAE
According to The UAE Economic Substance Regulations Relevant Activities Guide, businesses with the following activities should review and comply with the requirements of the ESR:
RELEVANT ACTIVITY |
CORE INCOME GENERATING ACTIVITIES (non-exhaustive) |
Banking Business |
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Insurance Business |
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Investment Fund Management Business |
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Lease-Finance Business |
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Headquarter Business |
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Shipping Business |
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Holding Company Business |
Activities related to a Holding Company Business. |
Intellectual Property Business |
Where the Intellectual Property Asset is a:
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Distribution and Service Centre Business |
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UAE ECONOMIC SUBSTANCE FLOW CHART
Ministry of Finance has issued an Economic Substance Flow Chart which determines whether entities are required to submit an annual notification and then file an Economic Substance Report or not.
According to the chart, some factors will enable a Licensee to understand if the ESR regulations apply to them or not, which are as follows:
Is the Licensee a corporate body in UAE?
Is the Licensee carrying on a Relevant Activity?
Is the Licensee an exempt company?
Is the Licensee earning gross income concerning the Relevant Activity?
The Date of commencement and end of the Financial Year.
Below you'll find a general interpretation of the Economic Substance Flow Chart that is issued by the UAE Ministry of Finance.
ECONOMIC SUBSTANCE REGULATIONS SUBMISSION DEADLINES
Ministry of Finance (MOF) has decided to centralize the record of ESR notification and reporting. Hence, If the Licensees are falling under ESR regulations they must file the notification to the MOF portal. Here are the following deadlines to remember:
MOF Portal Goes Live | 1st week of December |
ESR Re-submission of Notification | From 1st week of December onwards |
ESR 1st Annual Report | 31 January 2021 |
All UAE entities are strongly recommended to assess or re-assess whether and which of their entities and activities fall within the scope of the ESR and how to ensure they can meet the Economic Substance Test in respect of each relevant Activity.
HOW TO GET READY FOR ESR REPORTING
ESR Substance Report template for submission of the report has been provided by the MOF to enable Licensee preparation. Below is a list of key requirements of the Economic Substance Test as brief guidance for the preparation of every Licensee (if applicable):
Directed and managed in UAE |
The Licensee has to be “directed and managed” in the UAE for the Relevant Activity (ies) it undertakes (e.g., through holding and minuting board meetings in the UAE, having a UAE based manager and/or directors, etc.). |
Having adequate substance |
The Licensee has an adequate number of qualified employees, physical assets (e.g., office space), and annual operating expenditures in the UAE relative to the Activity undertaken. |
Core Income Generating |
The Licensee must perform the related CIGAs in the UAE. |
PENALTIES
Any Licensee who fails to comply with Ministerial Decision no.100 for the year 2020 on the issuance of directives for the implementation of the provisions of the Cabinet Decision no.57 of 2020 concerning Economic Substance Requirements shall be subject to the following penalties:
Failure to File Notification to MOF Portal | AED 20,000 |
Failure to Submit Report | AED 50,000 |
Failure to provide accurate or complete Information | AED 50,000 |
Moreover, here are the penalties in regards to demonstrating sufficient Economic Substance in the UAE for the relevant period:
1st year of failure | The penalty of AED 50,000 and Information exchange with the foreign competent authority of:
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2nd year of failure | The penalty of AED 400,000 and Trade / Commercial License could be suspended, withdrawn or not renewed, and information exchange with foreign competent authority as above. |
HOW WE CAN ASSIST YOU TO COMPLY WITH ESR
As a leading corporate service provider in the UAE, My Business Consulting DMCC is here to assist you to define to which extend Economic Substance Regulations apply to your business, provide expert advice on ESR Notification Filing to help you comply with all ESR requirements and avoid non-submission and penalties.
Considering that all UAE entities should assess whether they fall under the UAE Economic Substance Rules (as per the 2019 financial year), we can help entrepreneurs define which of the below compliance obligations company may have:

Notification filing

Having sufficient substance in the UAE

Filing of an annual substance return
Our trained experts can assist you in Economic Substance Regulations Notification Filing, providing clarification of the new government ESR criteria depending on the sector-specific business activity and guide you on the Compliance with ESR Reporting in the United Arab Emirates.
SERVICE PACKAGES
ESR Assessment or |
Our ESR experts will assist you in understanding the changes in ESR Regulations and help you ensure that your company is compliant with the updated regulations.
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ESR Re-notification |
Our ESR experts will process the ESR Notification under the Regulation. The services will include:
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ESR Reporting |
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If you have any questions, please, contact us today to get professional free advice at [email protected].
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