The main purpose of the ESR is to comply and bring specific requirements for the entities  incorporated in the UAE to demonstrate that the companies are carrying out the actual economic activity in the State that achieve economic substance interest and the basis to support that the incorporation in the UAE was not driven solely to benefit from the privileged tax regime.

The introduction of the ESR in the UAE brings the UAE in line with other jurisdictions that have recently issued economic substance legislation (e.g. BVI, Mauritius, Cayman Islands, Bermuda Bahamas,  Guernsey, the Isle of Man and Jersey), and affirms the UAE’s commitment to addressing concerns around the shifting of profits derived from certain geographical mobile business activities to “no or nominal tax jurisdictions”(called as “NOON’s”) without corresponding local economic activities.  Such type of companies uses NOON’s to park profits thereby harming the tax base of another jurisdiction.

The introduction of the ESR in UAE is one of the milestones for the UAE’s tax policy and it is an important step towards its affiliation with the global Organization for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) directives. Aside from this, the implementation of the Regulation should further strengthen and benefit the UAE in helping and assisting to address various reputational concerns such as in respect of transparency, which the jurisdiction has been subject to from international players and investors alike.