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How do Economic Substance Rules (ESR) affect business in UAE?

In April 2019, the UAE government introduced its Economic Substance Rules. These new laws ensure that companies registered in the country, both onshore and free zone-based, that carry out relevant activities are appropriately active – and investing – in the country.

The rules were introduced further to international scrutiny concerning non-domiciled directors using the UAE’s business environment purely for tax purposes.

However, the rules don’t impact every business – only those operating in finance, distribution, intellectual property, and shipping; as well as holding companies and company headquarters. 

Let’s look at what the rules specify and how they might affect you and your business.

Management structure

The way in which a UAE company is managed and owned is critical when deciding whether changes need to be made.

Essentially, companies that fall under these rules need to have someone running the business who is physically based in the UAE. This should be a C-level executive – either a managing director or a senior management team member.

Beyond that, regular board meetings must be held in the UAE as well – with written ‘minutes’ taken as evidence and signed by all directors. This is clearly stated in the legislation itself.

What does this mean for UAE business owners? If you, or your company’s managing director is based overseas, you need to ensure that appropriate action is taken swiftly. 

If no one senior is able to relocate here, then you will definitely need to find a senior manager on the ground in the UAE. If not, you run the risk of non-compliance (more on that below).

Income generation

Affected businesses need to ensure that all of their company’s income is generated in the UAE. Basically this means that work carried out – regardless of where clients are based – has to be completed by a business that has a physical presence here.

Not only that, but companies also need to ensure that a sizable amount of their operating expenses are incurred in the UAE.

What does this mean for UAE business owners? On the surface, the main issue is this: if you have a business here, you need to have a working office and must be contributing to the local economy through purchasing activity. 

This is a fairly standard expectation for most companies with an office in any nation. So, if you’re running your business in a way that reflects honest day-to-day operations and conducting all work at your office, there’s no issue.

Staffing and office space

As part of the Economic Substance Rules, companies operating in the sectors mentioned above need to prove that they have a number of employees working in the UAE. In addition, evidence of an appropriate amount of office space to accommodate them is also required.

Another rule states the companies also need to own adequate physical assets in the UAE – suggesting it may be contingent on the business’ operations – and therefore revenue.

What does this mean for UAE business owners? When it comes to having the right company setup, an office address is essential. While many smaller businesses that lay outside of Economic Substance Rules can simply ‘rent’ a P.O. Box address to operate a business in the UAE, for companies affected, a more permanent arrangement is needed.

That said, hiring qualified staff is not difficult here in the UAE. People from all over the world base themselves here to take advantage of the nation’s tax-free status, high standard of living, and favourable climate. You’ll be spoilt for choice when it comes to finding skilled finance, operations, and business management talent.

Reporting responsibilities

To comply with these new rules, companies affected need to declare to the authority that issued their original trade license details of the ‘relevant activities’ set out by the UAE government. 

Not doing so can result in a fine of up to AED 50,000 and repeat offences will incur other more severe financial penalties, and will lead to either suspension or the withdrawal of the non-compliant company’s trade license. 

What does this mean for UAE business owners? Essentially, there will be some degree of scrutiny over the way you operate your business – if your company is affected by the Economic Substance Rules. However, the nature of the information requested – details of profit, revenue, number of employees, registered address – is no more complex than anything required by a tax or licensing authority in any other part of the world. 

Still in the litmus test phase

It’s still year one for the UAE’s Economic Substance Rules, so the degree to which all of these regulations will be upheld remains to be seen. But as the government has made a commitment to addressing concerns around the shifting of profits – in the same way that other ‘offshore tax havens’ have, in order to avoid being on the EU’s tax blacklist – it seems that transparency is the biggest issue here.

Ultimately, if you’re keen to start a business – any kind of business – here in the UAE, it’s very important to fully understand the rules and regulations around the type of company you want to incorporate here. While there’s lots of advice out there, it’s always worth talking to an expert about the obligations behind any opportunities you’re looking to pursue.

What does this mean for UAE business owners? Despite these recent regulatory developments, if you do decide to relocate or start a new business here you’ll still be able to benefit from a tax-free corporate environment in one of the world’s most attractive business and lifestyle destinations. 

All things considered, the (minimal) red tape needed to get set up here will be worth it in the end. And business owners that legitimately want to live, work, and invest in the UAE have little to be concerned about.

Economic Substance Regulation Submission in UAE

What ALYA Auditors offers?
  • Consulting on ESR
  • Identify the qualifying entities for ESR compliances
  • Identify the qualifying business segments for ESR compliances
  • Report and advise on overall ESR readiness by the Entity
  • Ongoing ESR compliance
  • Secretarial services in connection with ESR record maintenance
  • ESR filing with the authorities in the proper /prescribed format