Economic Substance Regulations (ESR)
UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 for Economic Substance Regulations issued Subject On 30 April 2019. The Regulations apply to all UAE onshore and free zone companies that carry on a "Relevant Activity". It is yet to be confirmed whether the Regulations will also apply to sole proprietorship and branches, but we expect entities incorporated under offshore (free zone) companies regulations that carry on a “Relevant Activity” to be within the scope of the Regulations.
The following are considered as “Relevant Activities” under the Regulations:
- Banking Businesses
- Insurance Businesses
- Investment Fund Management Businesses
- Lease-Finance Businesses
- Headquarter Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Distribution and Service Center Businesses
The UAE economic substance regulations apply to Licensees with a financial year commencing on or after 1 January 2019.A Licensee that is directly or indirectly owned 51% or more by the UAE government is exempt from this regulations. In this respect, the “UAE government” includes the UAE Federal Government, as well as governments of any Emirate of the UAE.
To satisfy the economic substance requirements in relation to a Relevant Activity, a Relevant Entity must:
- Conduct the relevant “core income generating activities” (CIGA) in the UAE;
- Be “directed and managed” in the UAE; and
- With reference to the level of activities performed in the UAE:
- Have adequate number of qualified full-time employees in the UAE
- Incur an adequate amount of operating expenditure in the UAE
- Have adequate physical assets in the UAE.
A Relevant Entity that only undertakes a Holding Company Business will be subject to less stringent economic substance requirements. Additional requirements apply if a Relevant Entity carries out “high risk IP related activities”. If a Relevant Entity carries out more than one Relevant Activity, the economic substance requirements must be met for each of the Relevant Activities.
Failure to comply with the Economic Substance Regulations in UAE (ESR UAE) can let you face Penal Consequences in nature of administrative fines and other consequences such as:
- Financial Penalty ranging from AED 10,000 to AED 50,000 (in first year of non-compliance)
- Suspension of License
- Revocation of License
- Non-Renewal of License