Economic Substance Regulations (ESR) Compliance

Simplifying Economic Substance

As part of the UAE’s commitment as a member of the OECD 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 MoF issued a Cabinet Resolution on the Economic Substance (‘the Regulations’) on 30 April 2019 for which an Amended Resolution has recently been issued in August 2020 along with Updated Guidance. Economic Substance Regulations (ESR) states that every prescribed entity (‘Licensee’) that carries on Relevant Activities and derives an income from prescribed activities in the UAE are required to perform an Economic Substance Test. There are also certain exemptions prescribed.

If the Relevant UAE authorities determine that the Economic Substance Tests described above have not been met for a financial period, financial penalties could arise. Failure by an entity to comply with the Regulations shall result in penalties amounting from AED 10,000 to AED 400,000.

Economic Substance Test Declaration (filing a Report) must be submitted within 12 months from the end of their financial year (e.g. Report to be submitted by 31 December 2020 for entities with a financial year ending 31 December 2019). Further, Licensees also need to file a notification within 6 months of the close of its FY.

MBG Corporate Services has a diverse team of professionals across Tax, Finance, Law and Economics domains who review whether Economic Substance rules are applicable for your business and also clarify the extent to which they are applicable. Our team of experts can guide you through the measures that need to be taken to mitigate risks of non-compliance to ESR.

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