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Amendments to the UAE Economic Substance Regulations

Middle East
21/10/2024
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The UAE introduced the Economic Substance Regulations (“ESR”) on 30 April 2019, as part of its commitment as a member of the Organisation for Economic Co-operation and Development (“OECD”) Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”). The ESR (as initially enacted) required companies engaged in Relevant Activities (as defined by the ESR) to comply with the following three key economic tests:

  1. the core income generating activity test, requiring the core activities to be performed in the UAE;
  2. the directed and managed test, requiring the business to be directed and managed from the UAE; and
  3. the adequacy test, requiring adequate resources such as employees and assets in the UAE.

Amendments to the ESR

The Ministry of Finance published Cabinet Resolution No. (98) of 2024 in the Official Gazette on 16 September 2024, introducing significant amendments to the existing ESR.

Applicable Periods

The application of the ESR has been limited to accounting periods between 1 January 2019 and 31 December 2022 only. This means that, for periods ending after 31 December 2022, entities are no longer required to submit ESR notifications or reports.

Penalties

All administrative fines for non-compliance with the ESR for the financial year 2023 and beyond will be cancelled, and any penalties already paid will be refunded by the UAE Federal Tax Authority. Prior to these amendments, businesses faced up to AED 20,000 for failure to submit ESR notifications and AED 50,000 for failure to submit ESR reports.

Compliance Obligations

The amendments will be welcomed by businesses operating in the UAE. The changes introduced by these amendments align with the UAE’s implementation of corporate tax legislation (which requires entities looking to be treated as “Qualifying Free Zone Persons” to demonstrate adequate substance in the UAE) and are part of the UAE’s continuing efforts to ensure tax compliance.

Businesses will still need to ensure that they have complied with the ESR for accounting periods between 1 January 2019 and 31 December 2022 in order to avoid the risk of penalties.

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