Other BriefingsUAE Amendments to Economic Substance Regulations: Impact on Businesses
In a move to streamline business compliance, the UAE Ministry of Finance announced amendments to the Economic Substance Regulations (ESR) through Cabinet Resolution No. (98) of 2024, published on September 16, 2024. These changes mark an important shift for businesses operating in the UAE, significantly impacting their compliance obligations under the ESR framework.
Background of Economic Substance Regulations in the UAE
The ESR was initially introduced on April 30, 2019 as part of the UAE’s commitment to the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS).
The regulations were designed to ensure that companies engaged in specified “Relevant Activities” in the UAE maintained an adequate economic presence. To meet ESR requirements, companies were expected to pass three key economic tests:
- Core Income Generating Activity (CIGA) Test – ensuring core business activities are performed in the UAE.
- Directed and Managed Test – requiring the business to be directed and managed from within the UAE.
- Adequacy Test – stipulating the need for sufficient resources, such as employees and assets, within the UAE.
Key amendments to the ESR
A major change introduced by the recent amendments is the restriction of the ESR’s application to accounting periods between January 1, 2019 and December 31, 2022. This means that businesses with accounting periods ending after December 31, 2022 will no longer be required to submit ESR notifications or reports.
Additionally, all administrative fines for non-compliance with the ESR beyond 2022 have been canceled. Companies that had already paid penalties for failing to submit notifications or reports for the financial year 2023 and onwards will receive refunds from the UAE Federal Tax Authority. Previously, businesses faced penalties of up to AED 20,000 for failing to submit notifications and AED 50,000 for not submitting reports.
Impact on businesses and compliance obligations
The changes have been welcomed by companies in the UAE, as they simplify compliance obligations moving forward. The amendments also align with the UAE’s new corporate tax legislation, which mandates that entities seeking “Qualifying Free Zone Person” status must demonstrate adequate substance within the country.
Despite the easing of requirements for periods after 2022, businesses are still obligated to comply with the ESR for the periods between 2019 and 2022. Failing to meet these past obligations may still result in penalties.
The UAE’s latest amendments to the ESR reinforce the country’s ongoing efforts to enhance tax compliance while supporting businesses through regulatory updates that accommodate the evolving economic landscape.
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