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Since 2019, all companies in the United Arab Emirates, including Freezone, mainland and offshore companies, must comply with the Economic Substance Regulations (ESR) aiming towards the prevention of profit shifting and ensure transparency.
Legal entities carrying out certain activities are obliged to maintain adequate economic presence in the UAE. The following sectors are falling in the scope the ESR framework:
1. Banking business
2. Insurance business
3. Fund management business
4. Lease – finance business
5. Headquarters business
6. Shipping business
7. Holding company business
8. Intellectual Property (IP) business
9. Distribution and service centre business
Legal entities that are subject to the ESR are required to file an annual notification within 6 months from the end of the relevant financial period and an Economic Substance report within 12 months from the end of the relevant financial period.
Furthermore, in order to demonstrate substance in the UAE, these entities must meet an Economic Substance Test requiring the following:
1. The Company and Relevant Activity are being directed and managed in the UAE
2. The relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE
3. The Licensee has adequate personnel, premises and expenditure in the UAE.
The following flowchart could help you determine whether you are obliged to file a notification and report:
Exemptions
Several entities are exempt from the Regulations and are not required to file an Economic Substance Report or demonstrate substance in the UAE:
1. Legal entities that are tax residents outside the UAE
2. Investment funds and their underlying SPVs / investment holding entities
3. Wholly UAE resident-owned businesses that are not part of a multinational group and that only carry on business in the UAE
4. Branches of foreign entities that are subject to tax on all of their Relevant Income in foreign jurisdictions.
If your entity falls into the aforementioned categories, you shall provide sufficient evidence along with your Notification form.
*DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and one must not rely on it without receiving independent advice based on the particular facts of its own case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.
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