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 similar 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, we developed the first of its kind ES guide with a view to support UAE businesses with their reporting obligations. We launched the guide by hosting a 60-minute virtual event where our ES pracitioners provided an overview of the guide and the value it brings. We also provided a technical update on the latest ES developments and insight on how companies are dealing with ES compliance requirements including various available sourcing models.
Jan van Abbe
Jan is a Director based within the International and M&A Tax team in Deloitte, Dubai. He has 12 years of experience in business and international tax with Deloitte in Switzerland, Singapore and the UAE. has built a strong reputation for the provision of advice regarding inbound structuring and BMO/TP design. Jan leads the LSHC and THS offering across the regions. Jan is a Swiss Certified Tax Expert and holds a Master’s degree in Law from the University of St. Gallen (HSG).