Economic Substance Regulations in the UAE

Economic Substance Regulations in the UAE | Is Your License Affected?

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What is ESR (Economic Substance Regulations)?

Economic Substance Resolution (ESR) is a resolution on the Economic Substance (Cabinet of Ministers Resolution No.31 of 2019, the “Regulations”) crafted last 30 April 2019 in response to a review conducted on UAE’s existing tax framework. Additionally, this is considered as one of the initiatives of UAE being a  committed member of the OECD Inclusive Framework. 

In line with the released ESR, a guidance was issued as a follow-up last 11 September 2019 which brought about light as to questions regarding the implementation of the regulation. The Regulation further implies that all UAE onshore and free zone companies, as well as businesses that provide relevant activities as described, shall be “economically present” in line with the particular business activities they are into. 

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 Which activities will be affected by the ESR?

With the implementation of ESR, business activities will be affected. Included is as follows:

(a) Businesses as licensed in the State, including Banking Businesses licensed in a Free Zone or a Financial Free Zone such as:

 a.1 Banking Businesses

a.2 Insurance Businesses

a.3 Investment Fund Management Businesses

a.4 Lease-Finance Businesses

a.5 Headquarters Businesses

a.6 Shipping Businesses

a.7 Holding Company Businesses 

a.8 Intellectual Property Businesses

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Are Freezone and Offshore companies affected by ESR?

Freezone and Offshore companies, businesses, branches, partnerships (Licensees) and among others are affected by the ESR, provided they operate a relevant activity. As stipulated in the ESR, once a business is registered as an offshore or free zone, it is automatically subjected to the regulation and therefore should undertake relevant activity.

Moreover, any Licensee that earns income out of a relevant activity has to pass the Economic Substance Test per financial period. As an Economic Substance passer, a Licensee should exhibit the following:

(a) Licensee and Relevant Activity are being directed and managed in the UAE

(b) Relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE; and 

(c) Licensee has adequate employees, premises and expenditure in the UAE. In addition to an annual notification requirement, Licensees that undertake and earn income from a Relevant Activity are also required to file an Economic Substance Return within 12 months from the end of the relevant financial period (see Administration).

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If my business is conducted outside UAE do I still have to comply with ESR?

Often than not, there are a number of business and service providers registered in UAE who are not completely aware that they are already violating the ESR. For enlightenment on these matters, any business entities that are providing services outside UAE should review and seek legal aid on such concerns.

As for Licensees that carry out relevant activities within the UAE, they must follow the stipulations in the Economic Substance Rules. 

An example is a Shipping Business, which is defined by the Economic Substance Rules as any ship operations carried out not only within the territorial waters of UAE. Instinctively, if this business has a base office within the UAE, with branches overseas but managed by the base office, it may be included within the Economic Substance Rules. 

However, exemptions are given to businesses wherein more than 50% of which are directly or indirectly owned by the federal government, governmental authority or government of any Emirate.

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Are board meetings required to be conducted in the UAE? If yes, what all supporting documents are required?

Any Licensee is required to have board meetings within UAE, the number of meetings varies depending on the range and how essential the relevant activity it carries out. In each and every meeting, a Licensee must observe the following:

  • Directors must be in quorum requiring physical presence. In addition, minutes of the meetings must be updated and signed in UAE
  • Directors attending the board meeting must have the necessary skills and expertise to discharge their fiduciary duties. A Holding Company Business is not required to be directed and managed in the UAE, except where this is a requirement of the relevant licensing authority
  • Meetings are recorded in written minutes and signed by the directors attending the meetings
  • Minutes of all board meetings and the records of the Licensee are kept in the State
  • In the case of branch offices and representative offices of foreign companies and other commercial companies that do not have a board of directors but rather are managed and operated by a single manager, such managers shall be physically present in the State when making key decisions relating to the management and operation of these entities

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Economic Substance Regulations in the UAE was last modified: April 8th, 2020 by webteam4@varaluae.com