Adhering to UAE’s Economic Substance Regulations (ESR) is now a ‘must do’ reality facing business owners in the region, amid the challenging financial circumstances brought on by the COVID-19 pandemic.

New regulations, which were implemented in the UAE for fiscal years commencing January 1, 2019 and onwards, were announced by the government the last year and encompasses several industries in the country.

These regulations are now being tackled with renewed urgency by UAE corporates, to make sure they comply with the ESR (Economic Substance Regulations) before the deadline of January 31, after being extended from an earlier deadline of December 31. The Ministry of Finance (MoF) has worked over time to release an array of notices, statutory forms and guidance notes to ensure adequate details are at the disposal of licensees to prepare.

What are economic substance regulations?

The Economic Substance Regulations, or ESR, was issued by the UAE and is aimed at curtailing harmful tax practices and closely tracks the global standard set by the OECD (Organization for Economic Co-operation and Development).

As the UAE is a member of the OECD framework, 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 Economic Substance on April 30, 2019.

Why imposes such regulations?

The UAE is not a tax-free jurisdiction. In 2018, the UAE introduced VAT to the country, as well as an excise tax applicable to certain goods.

Corporation tax is levied on foreign banks and oil companies operating in the country, and the UAE Ministry of Economy has been clear for some time that it is studying the effect of the introduction of a more general federal corporate income tax.

With fiscal transparency and regulation being a global priority, international financial organizations such as the OECD champion better global co-ordination on tax regulation, including measures to tackle tax evasion, so that businesses cannot make profits from differences in tax legislation around the world.

Rules track similar moves made worldwide

The UAE is one of the several tax-free or low tax countries that have put similar regulations into practice last year – some of them being the Bahamas, Cayman Islands, British Virgin Islands, Mauritius, Seychelles, Jersey, Guernsey, the Isle of Man, and Bermuda.

As the UAE eyes prospects as an international incorporation destination, analysts say the country will be targeting to keep its most promising regard as one of the easiest countries in the world to do business in.

Companies active in these sectors are considered ‘relevant entities’ and must comply with economic substance regulations.

It applies to all companies established in the UAE (except those entities in which a minimum 51 per cent direct or indirect investment is from government authorities) and which have income from a relevant sector in any accounting period commencing on or after January 1, 2019.

However, allowances will be less stringent for those managing holding companies (such as those that only derive equity-based interest income) and additional requirements apply to anything related to high-risk intellectual property.

What are the economic substance tests that firms should get done?

All the firms falling under the above-mentioned list of activities, getting income in the relevant sector in the specified accounting period will be required to demonstrate adequate “substance” in the UAE

These are the pre-requisite tests that will allow the government to determine if firms comply with the norms.

News Courtesy : Gulf News

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