Obligations Under Economic Substance Regulations Come to an End with New Cabinet Decision

In 2019, the UAE issued its first Economic Substance Regulations (ESR) to comply with international initiatives to combat harmful tax practices, including unlawful tax avoidance and evasion. ESR required certain legal entities to demonstrate that they carry out substantial economic activities in accordance with the ESR.

The ESR required entities to file notifications (licensees and exempted licensees) within six (6) months from the end of their financial year. Some entities were obliged to provide a further report within twelve (12) months from the end of each financial year.

Failure to observe those deadlines resulted in material penalties that were imposed by the Federal Tax Authority, ranging between AED 20,000 up to AED 400,000.

The recent Cabinet Decision No. 98 of 2024 introduced substantial changes to ESR regime in the UAE:

• • • ESR notifications and reports are no longer required for financial years commenced after 31 December 2022
    • Penalties cannot be imposed on any entities that did not observe ESR filing deadlines relating to financial years started after 31^st of December 2022; and
    • Any penalties paid by licensees or exempted licensees relating to financial years started after 31 December 2022 are to be refunded. The actual mechanism of the refund is not yet confirmed. This should be specified by the Minister of Finance in future, through separate legislation.

This has undoubtably come as positive news to UAE businesses, considering it removes a potentially burdensome compliance obligation. It should be noted, however, that the requirement to demonstrate economic substance has not disappeared entirely, considering that this continues to be one of the conditions imposed by the corporate tax regulations. This is particularly relevant if businesses wish to benefit from a special tax regime.

If you have any questions related to the recently abolished ESR obligations, or to special corporate tax regimes, please do not hesitate to contact us.

• PATRYK KARCZEWSKI PARTNER pk@amereller.com

DUBAI | AMERELLER | One by Omniyat, 14th Floor | Business Bay | P.O. Box 97706 | Dubai, United Arab Emirates | T +971 4 432 3671
RAS AL KHAIMAH | AMERELLER TAX Consultancy FZ-LLC | Ras Al Khaimah Economic Zone | P.O. Box 16462 | Ras Al Khaimah, United Arab Emirates | T +971 7 204 6255

Obligations Under Economic Substance Regulations Come to an End