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Economic Substance(ESR) Relevant Activities in the UAE

The UAE introduced Economic Substance Regulations to honour the UAE’s commitment as a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS), and in response to a review of the UAE tax framework by the EU which resulted in the UAE being included on the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist).

The issuance of the Economic Substance Regulations on 30 April 2019, and the release of Guidance on the application of the Regulations on 11 September 2019, was a requirement for the removal of the UAE from the EU Blacklist on 10 October 2019. In consultation with the OECD and the EU, amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020 (the Regulations), and updated Guidance was issued on10 August 2020 (Ministerial Decision No. (100) of 2020 The Regulations ensure that UAE entities that undertake certain activities (Licensees – see Question [5]) are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE.

Relevant Activities:

  • Banking Business
  • Insurance Business
  • Investment Fund management Business
  • Lease – Finance Business
  • Headquarters Business
  • Shipping Business
  • Holding Company Business 
  • Intellectual property Business (“IP”)
  • Distribution and Service Centre Business​

Entities are expected to use a ‘substance over form’ approach to determine whether or not they undertake a Relevant Activity and as a result will be considered Licensees for the purposes of the ESR Regulations, irrespective of whether such Relevant Activity is included in the trade licence or permit of the entity.

A Licensee can undertake more than one Relevant Activity during the same financial period. This would
require the Licensee to demonstrate economic substance in respect of each Relevant Activity.

If a Licensee carries out a Relevant Activity, then the Licensee must review the requirements applicable
to such activity under the ESR Regulations.

An entity is not required to be actively engaged in any of the above business categories for it to be considered as carrying on a Relevant Activity. Any form of passive income from a Relevant Activity would bring the entity within scope of the ESR Regulations.

Relevant Income

A Licensee must satisfy the Economic Substance Test having regard to the level of Relevant Income derived from any Relevant Activity.

For the purposes of the ESR Regulations, “Relevant Income” means all of that entity’s gross income from a Relevant Activity as recorded in its books and records under applicable accounting standards, whether earned in the UAE or outside the UAE and irrespective of whether the entity has derived a profit or loss from its activities.
For the purposes of “Relevant Income”, gross income means all income from whatever source derived, including revenues from sales of inventory and properties, services, royalties, interest, premiums, dividends and any other amounts, and without deducting any type of costs or expenditure.

In the context of income from sales or services, gross income means gross revenues from sales or services without deducting the cost of goods sold or the cost of services. For the avoidance of doubt, gross income does not mean taxable or accounting income or profit.

Are you ready with ESR Return Filing in the UAE ?

If you are concerned about whether your business operations meet the ESR tests and compliance obligations, our team of specialists can help. Alya Auditors offers a range of services to help you in this journey.

We’re a leading firm of chartered accountants & VAT/Tax advisers supporting entrepreneurs, high net worth individuals, family offices and growing businesses in UAE.

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