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UAE Economic Substance Regulations detail how a company must be managed in the country

Failure to comply will mean hefty fines. Find out how it helps build business transparency

Adhering to UAE’s Economic Substance Regulations (ESR) is now a ‘must-do’ reality facing business owners in the region, amid the challenging financial circumstances brought on by the COVID-19 pandemic.

New regulations, which were implemented in the UAE for fiscal years commencing January 1, 2019 and onwards, were announced by the government the last year and encompass several industries in the country.

But with deadlines fast approaching – it has off late been and henceforth will be tackled with a renewed sense of urgency by many business owners in the UAE.

What are economic substance regulations?

The Economic Substance Regulations, or ESR, was issued by the UAE and is aimed at curtailing harmful tax practices and closely tracks the global standard set by the OECD (Organisation for Economic Co-operation and Development).

As the UAE is a member of the OECD framework, in response to an assessment of the UAE’s tax framework by the European Union (EU) Code of Conduct Group on Business Taxation, the UAE introduced a resolution on Economic Substance on April 30, 2019.


Economic substance is primarily a doctrine in the tax law of the United States – followed by several others worldwide - under which any transaction must have both a substantial purpose aside from reduction of tax liability and an economic effect aside from the tax effect in order to be considered valid.

Why impose such regulations?

The UAE is not a tax free jurisdiction. In 2018, the UAE introduced VAT to the country, as well as an excise tax applicable to certain goods.

Corporation tax is levied on foreign banks and oil companies operating in the country, and the UAE Ministry of Economy has been clear for some time that it is studying the effect of the introduction of a more general federal corporate income tax.

What are the upcoming deadlines to keep in mind?

The Emirates’ Ministry of Finance has given a timeline to the various regulating authorities for Free Zone and mainland companies in the UAE.

This is to ensure the ESR Notifications by all the companies whose financial year ends on December 31, 2019 should be done by no later than June 30, 2020 and the ESR Return submission be done by no later than December 31, 2020.

Given the deadline for doing ESR Compliances for all businesses in the UAE is just a few weeks away, it would be prudent for the businesses to get started on it right away, if not already done.

What are the economic substance tests that firms should get done?

All the firms falling under the above-mentioned list of activities, getting income in the relevant sector in the specified accounting period will be required to demonstrate adequate “substance” in the UAE

These are the pre-requisite tests that will allow the government to determine if firms comply with the norms.

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