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Economic Substance was introduced vide UAE Ministry of Finance in the form of Cabinet of Ministers Resolution No. 31 of 2019, dated 30 April 2019 (UAE ESR) followed by the Ministerial Decision No. 215 on the issuance of directives for the implementation of ESR and Cabinet Resolution 58 of 2019 determining the Regulatory Authorities for the purposes of UAE ESR. The UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 (concerning economic substance regulations in the UAE, “the Regulations”), requiring all in-scope UAE entities (“Relevant Entities”) that carry on certain activities (“Relevant Activities”) to have demonstrable economic substance in the UAE from 30 April 2019

Who is ‘Relevant Entities’?

Relevant Entity is that :

1. Juridical Person (incorporated inside or outside UAE) or
2. an unincorporated partnership 

registered in the state, including a free zone and a financial free zone and carries on a ‘Relevant Activity’. Entities are expected to use a ‘substance over form’ approach to determine whether or not they undertake a Relevant Activity and as a result will be considered Licensees for the purposes of the ESR Regulations, irrespective of whether such Relevant Activity is included in the trade license or permit of the entity.

Who are liable for ESR in UAE?

The UAE applies Economic Substance Regulations (ESR) to local companies located in the country including businesses in the free zones and those engaged in any of the defined ‘relevant activities’.

CIGAs or Core Income Generating Activities 

Article no. 3 of Resolution no. 57 also explains the Core Income Generating Activities of these businesses that execute the relevant activities as given by the Economic Substance Regulations in UAE. CIGAs are termed activities that are primarily carried out by the licensee for the purpose of generating enough income from the relevant activities being executed in the company or organization. The following can possibly be the CIGAs of each relevant activity; 

What are The Relevant Activities?

The following are considered as “Relevant Activities” under the Regulations:

• Banking
• Insurance
• Investment Fund management
• Lease-finance
• Headquarters
• Shipping
• Holding company
• Intellectual property
• Distribution and service centers

Economic Substance Test

The companies need to first notify the regulators whether they carry out the relevant activities as per the ESR or not and then follow it up with the requirements for the UAE economic substance test and file ESR report. The businesses that are within the scope of the UAE ESR, must prepare themselves to implement strategies for the annual UAE ESR notification and reporting. They must also need to satisfy the requirements for the UAE Economic Substance Test for which professional guidance of reputed ESR services firms in Dubai, UAE can be availed.

Below are the 5 requirements the companies need to have to undergo the UAE Economic Substance Test

1. Conduct Core Income-Generating Activities Within the UAE (CIGA)

2. Direct and Manage Business From Within the UAE

3. Employ Full-time Staff in the UAE

4. Incur Operating Expenditure in the UAE

5. Retain Adequate Physical Assets in the UAE

Reporting requirement for relevant Entities:

Relevant Entity will be required to submit an annual report (within 12 months from financial year-end) on its relevant activities to the relevant regulatory authority containing specified details and also declaration on whether ES test has been satisfied. 

The below table outlines the upcoming deadlines for a selection of FY ends:

If the company has a licensed activity but does not conduct or generate the CIGA from the relevant activity, ES tests requirement will not be applicable, however it will be required to provide a notification to the regulatory authority as per Article 8(1).

Penalties where the Economic Substance Test is not met

The below table outlines the penalties for a selection of offence/ violations

How can WISE help?

Wise team of Tax experts can assist you on every step of your ESR Compliance journey. Be it assessing the applicability of ESR for your business or filing notifications / reports and mitigating the risks of non-compliance.

Wise team will assist you with ESR compliances in the following ways,

• ESR Impact Assessment
• ESR Advisory
• ESR Notification and report Filing 

The Regulations require UAE onshore and free zone companies and other UAE business forms that carry out any of the “Relevant Activities” listed below to maintain an adequate “economic presence” in the UAE relative to the activities they undertake.
Related Activities:

• Banking Business
• Insurance Business
• Investment Fund management Business
• Lease – Finance Business
• Headquarters Business
• Shipping Business
• Holding Company Business
• Intellectual property Business (“IP”)
• Distribution and Service Centre Business

The Regulations provide a definition to each of the above Activities. The provisions of the Regulations shall not apply to Companies in which the Federal Government of the UAE or the Government of any Emirate of the UAE, or any governmental authority or body or any of them has at least 51% direct or indirect ownership in their share capital. The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are governed by the Regulations will need to submit a notification to their Regulatory Authority (defined under Cabinet Decision No (58) of 2019 issued on 4 September 2019) from 1 January 2020 onwards, and prepare and submit to the same Regulatory Authority an economic substance declaration within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019). An entity is not required to meet the economic substance test and file an economic substance declaration for any financial period in which it has not earned income from a Relevant Activity. Failure by an entity to comply with the Regulations shall result in administrative penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), and potential suspension, revocation or non-renewal of its registration.