October 31 2024

Changes to the Economic Substance Regulations in the United Arab Emirates

On October 14, 2024, the Ministry of Finance of the United Arab Emirates (MOF) announced significant changes to the Economic Substance Regulations (ESR) following the enactment of Cabinet Decision No. 98 of 2024. This decision amends Cabinet Decision No. 57 of 2020, dated August 10, 2020, relating to economic substance requirements, making substantial revisions to the existing regulations. These changes represent a step forward in strengthening the country’s competitiveness, aligning it with the new federal Corporate Tax framework.

Key Updates:

  • Cessation of ESR Obligations: Starting from the financial year beginning after December 31, 2022, companies classified as "Licensees" will no longer be required to submit Economic Substance Notifications or annual Economic Substance Reports. However, the ESR will continue to apply for financial years from January 1, 2019, to December 31, 2022.
  • Cancellation of Penalties: Administrative fines imposed for periods after December 31, 2022, will be annulled. Additionally, any fines that have already been paid will be refunded, although the refund mechanism will be communicated later.

  • Compliance with Tax Regulations: Even in the absence of ESR obligations from 2023 onwards, companies must ensure compliance with the federal Corporate Tax regulations, particularly for free zone entities seeking to benefit from the preferential 0% tax rate.

Considerations for Businesses:

  • Review of Past Compliance: Companies with ESR obligations from 2019 to 2022 should ensure they have accurately submitted all required notifications and reports and maintained sufficient documentation to demonstrate their economic substance in the UAE, as the Federal Tax Authority (FTA) retains the right to audit documents for six years.

  • Adjustment to Corporate Tax: Free zone entities must evaluate whether they meet the economic substance requirements to continue benefiting from tax exemptions. This includes demonstrating key economic activities, maintaining adequate resources, and employing qualified personnel.