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UAE ESR

Chapter Sixteen: ESR in Dubai

 

In 2019, The European Union blacklisted the UAE for tax purposes, as a result of an assessment of the country’s tax structure by the EU Code of Conduct Group on Business Taxation. The EU blacklists any country that doesn’t meet its criteria for tax transparency, fair taxation, and compliance to counteract base erosion of profit shifting (BEPS).

In a remarkable, swift response, on 30th April 2019, the UAE government introduced standard Economic Substance Regulations (ESR) that apply to all financial years starting on or after the 1st January 2019. Subsequently, the EU blacklist status was lifted from UAE by the end of the year and this positive move has generated renewed business and investor confidence for the UAE, throughout the global financial arena.

The ESR regulated by the UAE government applies to all jurisdictions, including the mainland, free zone offshore and any other financial free zones, like the DIFC. In the DIFC, the Registrar of Companies is the designated Regulatory Authority for ESR compliance. The main objectives of the regulations are to ensure that UAE trading entities demonstrate the extent of their trading activities in the UAE and accurately report profits commensurate with those activities.

When you set up a new business or branch office now in the UAE, or expand an existing business, you must register to carry out that relevant activity and that establishes you as a Licensee, for the purpose of ESR. Individual persons, sole proprietors, foundations and trusts do not fall into the scope of the ESR. A Licensee carrying out one or more relevant activities to derive income must maintain and demonstrate sufficient ‘economic presence’ for those activities, in the UAE. They must meet the criteria of an Economic Substance Test and submit an Economic Substance Report annually.

The report must provide the information stipulated by the regulations, including:

 

  • a description of the Relevant Activity undertaken
  • the income earned by that activity
  • the Core Income-Generating Activity performed under the Relevant Activity

 

The Licensee is not required to meet the Economic Substance Test in any financial year where the entity generates no ‘Relevant Income’. There are also exemptions to the categories governed by the ESR. Exempt trading entities must support their claim by providing evidence to substantiate their status as an Exempted Licensee, for each financial year of trading. The Licensees exempt from filing an Economic Substance Report include:

 

  • Investment funds
  • A Licensee that is not a UAE tax resident
  • A business wholly owned by a UAE resident/s that is not part of a multinational enterprise group and only carries out business within the UAE
  • The UAE branch of a foreign enterprise that is subject to taxation on the Relevant Income in a foreign jurisdiction

 

For the UAE to safeguard its carefully won international reputation as a modern, competitive environment for investors and businesses, it must actively police the ESR regulations and identify cases of non-compliance. The UAE has established a National Assessing Authority responsible for determining whether any Licensee has adequately complied with the ESR regulations. Failure to comply with the regulations can result in penalties, suspension, revocation or non-renewal of a Licensee’s license or permit.

We understand that establishing a new business in a foreign country can be daunting. When you need reliable business consultancy services, Turnkey Family Office is the answer. You can rely on our trustworthy network of expert advisors and professional business service partners, to guide you through the various rules and regulations that will ensure you can trade and invest with complete confidence and security. Contact us at https://www.turnkeyfo.com/

For further information:

https://www.mof.gov.ae/en/strategicpartnerships/pages/esr.aspx

https://www.difc.ae/

https://www.emiratesca.com/economic-substance-regulations-uae/

You can reach out to us through WhatsApp to freely discuss your needs.

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