Economic Substance Regulations cancelled by UAE Ministry of Finance
Leave a CommentEconomic Substance Regulations – Introduction
On October 15, 2024, the UAE Ministry of Finance officially announced the cancellation of the Economic Substance Regulations (ESR).
This significant development follows the introduction of the Federal Corporate Tax (CT) Law and marks a pivotal shift in the regulatory landscape for businesses operating in the UAE.
The cancellation was formalised through Cabinet Resolution No. (98) of 2024, which amends the earlier provisions of Cabinet Resolution No. (57) of 2020 on Economic Substance Requirements.
This article explores the background, implications, and key provisions of the latest resolution.
Background: Economic Substance Regulations in the UAE
The Economic Substance Regulations were initially introduced on April 30, 2019, through Cabinet Resolution No. 31 of 2019, as part of the UAE’s commitment to the OECD Inclusive Framework on BEPS and to address the EU’s concerns about the UAE’s tax framework.
This move aimed to ensure that the UAE was removed from the EU’s list of non-cooperative jurisdictions for tax purposes (EU Blacklist), which occurred on October 10, 2019.
The regulations required UAE onshore and free zone companies conducting specific “Relevant Activities” to meet an Economic Substance Test by maintaining sufficient substance in the UAE.
However, with the advent of the Federal CT Law, the relevance of ESR has diminished, leading to its eventual withdrawal.
Key Provisions of Cabinet Resolution No. (98) of 2024
Applicability of ESR
The new resolution limits the applicability of ESR to fiscal years beginning January 1, 2019, and ending December 31, 2022.
For financial years commencing after December 31, 2022, UAE entities are no longer required to comply with ESR obligations, including filing notifications or reports.
Administrative Penalties Cancelled
Penalties imposed for non-compliance with ESR obligations for financial years beginning after December 31, 2022, have been revoked.
The Federal Tax Authority (FTA) will refund fines already paid, and procedures for claiming these refunds are expected to be announced soon.
ESR Audits for the Effective Period
Although ESR obligations have ended for financial years after December 31, 2022, businesses must retain documentation for ESR submissions made during the effective period (2019–2022).
The FTA continues to audit filings for this period, and entities should be prepared for such reviews.
Implications for UAE Businesses
Transition to the UAE CT Regime
With the cessation of ESR, businesses can now direct their focus toward compliance with the UAE CT Law.
Clarifications on administrative procedures for penalties and filings related to the post-ESR period are anticipated.
Refund of Penalties and Closure of Grievances
Entities that have paid fines or filed appeals for fiscal years ending after December 31, 2022, can seek refunds and expect the resolution of their grievances.
Businesses should monitor updates from the FTA on refund procedures.
Documentation and Compliance
For the ESR period (2019–2022), entities should maintain proper records of filings and ensure readiness for potential audits.
Economic Substance Regulations – Conclusion
The cancellation of ESR signifies a shift in the UAE’s approach to economic regulation, reflecting the evolving tax framework under the UAE CT Law.
Businesses must align their operations with the new regulatory requirements while addressing any residual ESR obligations for the 2019–2022 period.
Final Thoughts
If you have any queries about this article on the UAE Ministry of Finance’s cancellation of Economic Substance Regulations or tax matters in the UAE, please get in touch.
Alternatively, if you are a tax adviser in the UAE and would be interested in sharing your knowledge and becoming a tax native, then please get in touch. There is more information on membership here.