Economic Substance Reporting

The United Arab Emirates (UAE) released the Cabinet of Ministers Resolution n. 31/2019 with effect from 30 April 2019, concerning the Regulations for Economic Substance (ES) in the UAE. The introduction of the new ES rules is a milestone for the UAE’s tax policy towards its alignment with the global Organization for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) directives.

In May 2018, the UAE joined the OECD Inclusive Framework on BEPS and committed to introduce the minimum standards. One of the requirements to be adopted by the UAE refers to BEPS Action 5 which aims to prevent businesses from setting up corporate structures by relocating activities to jurisdictions with a privileged tax system for the sole purpose of benefiting from a more advantageous tax regime.

The purpose of the ES rules is to bring specific requirements for businesses to demonstrate the actual economic activity in the UAE. The UAE is in line with other jurisdictions that are parties of the OECD Inclusive Framework and have similar tax environments, i.e. no or only nominal tax (NOONs), which have also introduced ES regulations recently (for example, Bahrain, Cayman Islands, Mauritius and British Virgin Islands).

The UAE ES rules are broadly similar to the regulations introduced by other countries, as they follow the guidance issued by the EU and OECD. Essentially, there are three tests that a resident entity (or ‘Licensee’ as foreseen in the UAE law) that undertakes relevant activities (further details below) should fulfill to demonstrate economic substance.

For more details on ESR, please read our article...

ESR in UAE