Economic Substance Regulations

The Organisation for Economic Development and Cooperation (OECD) has standards to counter risks of base erosion and profit shifting in jurisdictions where there is a nominal or no tax regime. All members of the OECD must adhere to such standards. As a member, the UAE’s legal and commercial framework must be compatible with global standards. The OECD required the UAE to introduce economic substance requirements in their domestic legislation.

Effective from 1 January 2019, The Economic Substance Regulations are applicable to all the Licensees within the UAE’s jurisdiction and also include all Licensees operating within free-zones in the UAE. Offshore Companies, any person or company holding a trade license or certificate of incorporation to carry out any business activity is falling under Economic Substance Regulations.

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.

The primary objectives of ESR in the UAE include:

• Avoiding being blacklisted by international organizations.
• Ensuring that businesses are not just shell companies without real economic activities.
• Promoting transparency and compliance in business operations.
• Preventing tax evasion and ensuring that companies pay taxes where they generate profits.