Tax planning through tax heavens, BEPS, ESR, POEM

Economic Substance Regulations (ESR) in the UAE

16 August 2020,Sagar Chandiramani, Finance Director,Virtuzone


The Economic Substance Regulations (ESR) was introduced in countries across the globe to seek compliance from major regulatory bodies based in Europe and the United States. These regulations are targeted at jurisdictions that offer minimal tax liabilities to businesses and require certain entities conducting specific types of business activities to demonstrate that they have adequate economic substance in that jurisdiction. 

The regulations highlight the regular recording, tracking and reporting of all the economic activities carried out by legal entities in the UAE, including companies, branches and subsidiaries, as well as those based in any of the free zones in the UAE.

The Council of the European Union has laid out certain criteria that these jurisdictions need to comply with as part of its efforts to promote transparency in cross-border transactions and to restrict harmful tax practices. Should the European Union (EU) consider that a certain country does not have substantial economic substance regulations, then that country will appear on EU's list of non-cooperative jurisdictions for tax purposes, also known as the EU 'tax haven' blacklist.

An assessment carried out by the European Union on the tax framework of the United Arab Emirates resulted in the country being deemed a non-cooperative tax jurisdiction and its inclusion on the EU blacklist. On 30 April 2019, the UAE Cabinet adopted new ESR in response to concerns expressed by the European Union Code of Conduct Group about the tax framework of the UAE and its commitment to the anti-Base Erosion and Profit Shifting (BEPS) Action Plan proposed by the Organization for Economic Cooperation and Development (OECD).

The UAE is now part of the BEPS Inclusive Framework (BEPS IF), which comprises of more than 130 countries and jurisdictions. As an Inclusive Framework member, the UAE is committed to implementing the minimum standards monitored by BEPS IF to increase tax-related transparency, something which the BEPS thrusts upon itself. 

The UAE has complied to implement a set of four minimum standards laid out by BEPS:

  • Countering Harmful Tax Practices
  • Prevention of Granting Tax Treaty Benefits in Inappropriate Circumstances
  • Country-by-Country Reporting
  • Mutual Agreement Procedure

The UAE's ESR requires businesses to assess whether the newly introduced regulations apply to them. Businesses that are able to demonstrate that they are carrying out substantial economic business activities within the region are considered relevant and need to implement strategies in preparing for the notification and reporting requirements prescribed by their relevant Regulatory Authority.

The UAE Ministry of Finance and the various Regulatory Authorities across the UAE have issued an ESR Notification template, which all legal entities must complete, unless as prescribed otherwise by the relevant Licensing Authority, to notify and report to their relevant Regulatory Authority whether or not they undertake and generate income from the list of relevant activities.

Who Needs to Submit an Economic Substance Notification?

A licencee undertaking one or more of the following Relevant and Core Income Generating Activities during the relevant year must file a Notification with the Registration Authority:

  • Banking Business
  • Insurance Business
  • Investment Fund Management Business
  • Lease-Finance Business
  • Headquarter Business
  • Shipping Business
  • Holding Company Business
  • Intellectual Property Business
  • Distribution and Service Centre Business

For further information and explanation on each of the above Relevant Activities, please refer to the Relevant Activities Guide issued by the Ministry of Finance.

What Are the Economic Substance Compliance Requirements Under the Regulations?

All licencees (either onshore, offshore or in a free zone) must comply with the Economic Substance Notification & Return Filing obligations. In order to demonstrate substantial economic substance, a company needs to review its corporate governance structures and operating models and make relevant changes where possible. The compliance requirements imposed on UAE companies under the Regulations are as follows:

  • The company must perform its core income-generating activities (CIGAs) in the UAE;
  • The company must be directed and managed within the UAE in relation to the its business activity, evidencing that company holds board meetings and annual general meetings, with a quorum of directors and shareholders physically present in the UAE;
  • The company is required to have an adequate number of full-time employees, incur operating expenditure, and have physical assets for carrying out the relevant business activities in the UAE; and
  • The company must be able to demonstrate that it controls the execution of activities that have been outsourced to third parties.

Economic Substance Notification & Return Filing

All UAE companies (onshore, offshore or Free Zone) that hold a licence and carry out any of the 'Relevant Activities' during the year, have to file a notification unless as prescribed by the relevant Licensing Authority, as per the template prescribed by the relevant Licensing Authority. 

The Regulation has prescribed what needs to go in the form of a notification, and those are:

  • Whether or not the company carries out relevant activities;
  • A description of the type of relevant activities carried out by the company and the type of income from those activities;
  • Whether the income earned from core income generating activities (CIGAs) is taxable in a jurisdiction outside of the UAE;
  • If the licencee is a tax resident outside of the UAE and if yes, where; and 
  • If at least 51% of the business is owned, directly or indirectly, by the Federal or an Emirate Government, or a UAE Government body or authority;
  • The first reportable financial year the business is subject to.

A company carrying out relevant activities, must submit an Economic Substance Report annually to the Regulatory Authority, in order to evidence that the company satisfies the economic substance requirements. 

The Economic Substance Report should include:

  • The value and type of income earned from the relevant activities;
  • The location of the activities and the property and/or equipment used to conduct the activities;
  • The number of employees, their qualifications, and the number of people responsible for conducting the activities; and
  • A disclosure stating that the company has met the economic substance requirements.

What Are the Penalties for Non-Compliance?

Failure to comply with the ESR or the provision of incomplete or inaccurate information, may result in your business being imposed with an administrative fine of between AED 10,000-50,000 during the first fiscal year. Furthermore, for the subsequent fiscal year of non-compliance, your business can be imposed with an administrative fine of between AED 50,000 and AED 300,000. It is worth noting that the Licencing Authorities may even suspend, revoke or deny renewal of your commercial licence if the fines are unpaid. 

UAE lays out 2023 corporate tax plan

Companies in the UAE has to prepare for a corporate tax regime in 2023, while the Trump Organization was found guilty of 17 counts of tax fraud.
The UAE issued a federal decree on the taxation of corporations and businesses today, December 9, to prepare the groundwork for a 9% rate on taxable profits of more than Dh375,000 ($102,000).

The legislation will come into force on June 1 2023. Profits below Dh375,000 will face a zero rate to provide support to small businesses and start-up companies. This may still allow smaller businesses to claim money back from the tax administration.

At the same time, the federal corporate tax regime will maintain targeted exemptions for extractive industries, pension funds and investment funds. A zero rate will apply to qualifying income made in free trade zones.

The Ministry of Finance designed the corporate tax regime to normalise UAE tax policy because the Arab Gulf nation was blacklisted by the EU as a non-cooperative tax jurisdiction. However, the 9% headline rate is below the OECD’s global minimum rate of 15%.

Nevertheless, the UAE government maintains it supports the global minimum corporate rate, so it’s possible that the 9% will be raised to 15% if the world implements pillar two.

Siqalane Taho, Josh White December 09, 2022 for

Anti-Base Erosion and Profit Shifting (BEPS) Action Plan proposed by the Organization for Economic Cooperation and Development (OECD).