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Economic Substance Regulations in the UAE

Economic Substance Regulations in the UAE

The economic substance regulations (ESR) concern all entities that engage in activities within the UAE as per their regular business and commensurately make revenues and profits within the UAE. With the help of our company formation agents in Dubai, international businesses can understand better the ESR in Dubai and can also be helped, depending on the case, with the company incorporation in Dubai and the types of structures available.

A few facts about ESR in Dubai

The background for the removal of UAE from the EU blacklist on October 2019, goes back to the first half of 2019 when in April, the UAE Government issued a cabinet resolution. The exact resolution, issued on 30th of April 2019, was the UAE Cabinet of Ministers Resolution No. 31 which specifically addressed Economic Substance Regulations in UAE (the Regulations).

By September 2019, a set of guidelines was issued regarding how these economic substance regulations would apply, and how they must be adhered to. It was this resolution and the application guidelines that served as a strong basis for the removal of UAE from the EU blacklist.

Why are ESR in Dubai important?

These economic substance regulations emphasized whether the profits made by such entities are proportionate to the scope of activities conducted within the UAE. Any disproportionate or artificial profits that arise due to activities within the UAE would be specifically dealt with penalties under the economic substance regulations.

Put simply, the economic substance regulations determine the reason for the establishment/existence of each business entity in the UAE. This establishment comes from the activities they do, the revenues they make, and the profits generated. More about economic substance regulations in Dubai can be discussed with our local representatives.

How do the economic substance regulations benefit businesses?

Rather than viewing the economic substance regulations as a compliance challenge, it becomes very important to view the economic substance regulations more as a benefit. For any legitimate business enterprise already compliant with the economic substance regulations, the reporting becomes a mere formality, while the larger benefit for the business is its ethics and strong foothold. The fact that a business is already conducting its activities, earning revenues, and making profits proportionately in the UAE lends strong credibility to an organization’s image and the reporting under economic substance regulations adds strong testimony.

We can also help you if you want to open a company in Dubai.

What are company secretarial services?

The services that we provide for aiding businesses to report their compliance under economic substance regulations are referred to as company secretarial services. We would be responsible as competent advisors to report your business information to the Government on your behalf, and as per the guidelines laid down by the economic substance regulations. Contact us for more about ESR in Dubai.

What is the first step? – Economic substance regulations in Dubai

Our internal experts have carefully and judiciously studied the detailed economic substance regulations issued under the resolution by the UAE Government. It is our initial assessment that the first step to reporting compliance is to gauge whether businesses even come under the scope of the economic substance regulations.

This gauging of relevance is done by an initial economic substance regulations test. Through our company secretarial services, we help you confirm whether your trade license activities are all under the scope/jurisdiction of UAE. The next step under the economic substance regulations test is to assess whether you have adequate employees performing such activities.

Steps in the economic substance regulations test

Following the initial assessment, the detailed steps to reporting compliance cover the following steps:

  • Assessing all your business activities through company secretarial services;
  • Providing detailed segregation of business activities under the “relevant” category;
  • Ensuring that all necessary documents are properly screened to prove the board meetings and quorum;
  • Income identification, income assessment, and income reporting for only relevant activities;
  • Proper segregation of all relevant information into reporting periods as per Government requirements;
  • Providing a comprehensive list and report for all full-time employees who enable the business to proceed with its relevant business activities;
  • Delivering detailed guidance and advice regarding the economic substance.

What are the relevant activities mentioned by ESR in Dubai?

From the beginning, it must be stated that the level of economic substance of a licensed business owner obliged to determine under the ESR in Dubai test is done depending on the activities developed in UAE. Here are some sectors of interest in this sense:

  • banking and insurance,
  • investment fund and management,
  • shipping and logistics,
  • intellectual property,
  • distribution services
  • holding companies, etc.

Thus, those who are active in the respective fields or who own a specific type of company may be requested to prepare a notification and maybe even a report, documents that should be sent to UAE Ministry of Finance.

About economic substance notification and its purpose

As mentioned above in the article, certain economic operators in UAE must make a special report to the Ministry of Finance in the UAE. As such, a notification should be drawn up every year. Such a document should include information about the activities carried out, if they are regulated if it is one or more, and if they have generated income. Such notification should be prepared 6 months before the end of the financial year in Dubai. We recommend those interested in such a notification to contact our specialists. We can tell you more about economic substance regulations in Dubai.

What should the economic substance report include?

The economic substance report that must be registered with the UAE Ministry of Finance must include the following aspects:

  • income,
  • expenditure,
  • number of employees,
  • company assets,
  • company governance.

Therefore, an economic substance report implying specific activities in UAE and generating income must be prepared every year. If there are exceptions regarding the activities carried out, the companies in question are not obliged to draw up such a report. Also, there is no obligation to meet the economic substance test.

Conclusions about economic substance regulations in Dubai

ESR in Dubai may seem quite complex for those coming for the first time in UAE for business. Therefore, it is recommended to pay special attention to the type of economic activity, to know from the beginning if an extra report is needed.

In addition, you can always opt for the services offered by our company formation agents in Dubai, both for the establishment of the company, as well as for other information related to reporting, analysis, and business.

What happens if we do not comply with ESR in Dubai?

The resolution regarding economic substance regulations is highly critical and all businesses are expected to provide their reporting of compliance, irrespective of the magnitude. Whether companies have all their activities and income duly covered within UAE and backed by documentary evidence, they are still expected to provide such compliance as part of the economic substance regulations. Depending on the nature of the non-compliance, the penalties have been enumerated by the Government. Penalties start from AED 10,000 and go up to AED 300,000 or even suspension of trade license.

Types of companies that can be opened in Dubai

Entrepreneurs should observe the economic substance regulations and make specific reports as stipulated by the legislation when registering a company. Foreigners can opt for limited liability companies, partnerships, free zone companies, branch offices, joint ventures, and holding companies, among others. Each structure is different, but depending on the business plan, you can opt for the optimal one from those listed above, specifying that the limited liability company is the most used. Here are some facts about the UAE economy, if you want to get an idea before starting a business in Dubai:

  • The first 6 months of 2023 recorded an increase in real GDP of approximately 3.2%.
  • Over 48% of the economic growth recorded in UAE in the same period was supported by sectors such as transport and logistics.
  • Also in the first 6 months of 2023, the hospitality sector registered an increase of approximately 9.2%.

You can count on us if you want to set up a company in Dubai.

In short, it becomes essential to abide by the reporting guidelines as per the ESR in Dubai. On the other hand, those interested in immigration to Dubai can opt for the services offered by our firm and ensure that they will benefit from a simple and fast process, without complexities.

Do get in touch with us to know more about how to report your business information under the economic substance regulations.