According to Cabinet of Ministers Resolution (no. 31, 2019), on the 30th of April, United Arab Emirates enforced Economic Substance Regulations for being an active member of the Organization for Economic Cooperation and Development (OECD), and to enhance the tax framework of UAE. These Economic Substance Regulations were only amended once in August 2020 (Cabinet of Ministers Resolution, no. 57, 2020).
The purpose of these regulations is to make the free zone, onshore and some other businesses in the UAE validate their economic presence and actively perform their relevant activities in the UAE. For this purpose, the businesses would be subjected to an Economic Substance Test. This is only applicable to businesses performing some relevant activities such as the following;
- IP or Intellectual Property Business
- Shipping Business
- Headquarters Business
- Investment Fund Management Business
- Banking Business
- Service Centre Business
- Holding Company Business
- Lease/Finance Business
- Insurance Business
All these entities will need to check which activities performed by them fall under ESR and also they need to ensure that all the requirements of ESR are met.
Economic Substance Regulations In JAFZA
ESR in JAFZA, specifically, was brought in to ensure that the economy of the country is accountable, clear, and transparent. It also aimed to improve the economic infrastructure of the UAE. JAFZA verifies that all the free zone and offshore companies in the area that fall under the scope of ESR abide by its rules and regulations.
In 2020, ESR in JAFZA mandated all eligible free zone businesses to file an economic substance regulation notification. In addition to this, the eligible business firms also need to perform an Economic Substance Test as per the requirements of ESR in JAFZA.
Who Needs to File the ESR Notification?
All the business firms mentioned above fall under the scope of ESR in JAFZA and are required to file the notification that gives the details of the company including its active presence and relevant activity list to the concerned authorities. The authorities will then subject the business firm to the mandatory Economic Substance Test.
The notification to ESR needs to be filled annually by the eligible business firms and they are also required to submit an Economic Substance Report by the end of their financial year. All the companies that are eligible for ESR must reveal the following details in order to file the notification;
- The activities they perform in the UAE
- Year-end date of one financial year
- For any yearly earnings outside the UAE, the required taxation
In addition, the Economic Substance Test has its own requirements that need to be met by the companies who need to perform a test.
Which Company Does Not Need to Perform the Test?
A business firm that falls under the scope of ESR in JAFZA but has not earned anything from its yearly economic activities or is exempted for some reason will not be required to perform the Economic Substance Test. Similarly, such companies will also not need to submit the annual economic report.
Talk to Economic Substance Regulations team today!!Our chartered accounts are experienced and provide their expert consultation to companies in the UAE and especially for UAE free zones.
Syed Hassan Ali carries with him an experience of 13 years in providing legal guidance and consultancy. He is a holder of two degrees, one in Business Management and the other in Economics for Engineers and Scientists. He carries an in-depth knowledge of the UAE market and continues to be an asset to businesses, providing clarity regarding applicability of the ESR regulations as well as guide them in making informed decisions.