Economic Substance in the UAE | Manual to ES compliance

Economic Substance Regulations (ESR) were introduced in the United Arab Emirates (UAE) in 2019. The purpose of the ESR is to prevent businesses, typically multinational corporations, from artificially shifting profits to jurisdictions that impose little or no income tax without having substantial activities in that jurisdiction to take advantage of their tax laws. The UAE is considered one of these jurisdictions.

Accordingly, the ESR impose an obligation on all entities that carry geographically mobile business activities to annually submit a comprehensive report to the authorities. The aim of this is to demonstrate that these businesses have substance and legitimate operations in the UAE. The first filing season, in relation to FY19, was completed by the end of 2020. Businesses should now be looking at the second filing season.

Failing to report or not being able to demonstrate that an in-scope entity has substance in the UAE would result in sanctions, such as financial penalties and license revocation. It is therefore important that entities operating in the Emirates are aware of the impact the ESR has on them in order to avoid any unnecessary burdens and to ensure business is maintained as usual. A number of businesses have received penalties for formal mistakes including late filing or not submitting required documentation. The Federal Tax Authority has not started performing audits under the ESR.  

Given the importance of the ESR, Deloitte has released the first ever manual which provides comprehensive guidance on ESR. The manual will help your business manage the ESR lifecycle, as well as address some of the common pain points including but not limited to changes in the tax/finance teams and/or reallocation of responsibilities that may result in a loss of knowledge, and ultimately incorrect/late filings and penalties. Our ESR manual can also be customized to suit your organization’s needs. The manual covers:

• A compilation of all the relevant FTA laws, regulations, and Frequently Asked Questions (“FAQs”) in one document;
• Detailed instructions and step-by-step manual on how to perform a Relevant Activity assessment and complete the notification and report;
• Guiding questions to determine whether the ES tests are met; and
• Additional practical commentary from Deloitte practitioners that have been dealing with the ESR on a day-to-day basis.