The UAE Ministry of Finance cancels Economic Substance Regulations

October 15, 2024

With the Introduction of Federal UAE CT Law, the UNITED ARAB EMIRATES MINISTRY OF FINANCE issued Ministerial Decree No. (239) of 2023 on the Reconstitution of the Standing Committee to Follow Up the Implementation of Economic Substance Requirements

Consequently, The Ministry of Finance, with the approval of council of ministers have issued Cabinet Resolution No. (98) of 2024 (the resolution) amending some provisions of Cabinet Resolution No. (57) of 2020 concerning the Determination of Economic Substance Requirements – The Economic Substance Regulations

The Economic Substance Regulations (ESR)

The UAE introduced Economic Substance Regulations to honor the UAE’s commitment as a member of the OECD Inclusive Framework on BEPS, and in response to a review of the UAE tax framework by the EU which resulted in the UAE being included on the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist). The issuance of the Economic Substance Regulations on 30 April 2019 (the Regulations), and the subsequent release of the Guidance on the application of the Regulations on 11 September 2019, was a requirement for the removal of the UAE from the EU Blacklist on 10 October 2019.

On 30 April 2019, the Cabinet of Ministers of the United Arab Emirates (“UAE”) issued Cabinet Resolution No. 31 of 2019 Concerning Economic Substance Regulations (“Resolution 31”). On 10 August 2020 amendments were introduced to Resolution 31 by the Cabinet of Ministers by way of Cabinet of Ministers Resolution No. 57 of 2020.

The Regulations required UAE onshore and free zone companies and certain other business forms that conduct any of the defined “Relevant Activities” to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (“Economic Substance Test”).

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Cabinet Resolution No. (98) Of 2024

The new resolution defines the period for applicability of the Economic substance Regulations (ESR). It provides information on the Fiscal years for which ESR compliance were required to be met and also confirms the cessation of Economic substance Regulation in the UAE.

It cancels the requirements for UAE entities falling under the Scope of ESR (Licensees) to submit Economic substance notification and Economic substance Report for financial years ending after 31 December 2022.

Article I and Article II of the Cabinet Resolution No. (98) of 2024 are discussed below in details

Article I – Applicability of Cabinet Resolution No. (57) of 2020

A new article No. (2) bis – Scope of Application shall be added to the aforementioned Cabinet Resolution No. (57) of 2020

As highlighted above, The Ministry of Finance has restricted the scope of application of Cabinet Resolution No. (57) of 2020 only until the fiscal year ending on 31/12/2022. Accordingly, the provisions of this resolution shall apply to the fiscal years commencing from 01/01/2019 to the fiscal year ending on 31/12/2022 – The ESR Period

Will the Entities need to file ESR Notification and Report on for FY starting on or after 01 January 2023?

The UAE Entity that meets the definition of Licensee post the ESR Period- starting on or after 01 January 2023- will no longer be required to comply with the ESR reporting obligations or demonstrate adequate substance in the UAE. We can conclude that ESR regime in the UAE stands cancelled from financial years starting on or after 01 January 2023

For the ESR filings that have been already submitted by Licensees for Financial years falling after the ESR Period – a further clarification is expected from the authorities

ESR filings done for applicable ESR period – 01/01/2019 to 31/12/2022, can be assessed by the National Assessing Authority – FTA. ESR Audit for the effective period has already been started by FTA for quite a sometime now (Refer our detailed article on ESR AUDIT)

Therefore, Entities should maintain proper documentation and be prepared for ESR Audits for ESR period 01/01/2019 to 31/12/2022.

Article II – Administrative fines stand cancelled

So, what happens to the administrative penalty for non-compliance levied on any financial years commencing after the ESR Period? The decision clarifies that such administrative penalties will be cancelled by FTA and the amounts collected will be refunded

The procedure to apply for refund in this regard is expected by the authorities

Key Takeaways

Scope of Cabinet Resolution No. (57) of 2020 concerning the Determination of Economic Substance Requirements shall remain applicable only for fiscal years commencing from 01/01/2019 to the fiscal year ending on 31/12/2022. The ESR regime in the UAE has been withdrawn for Financial Years starting after 31/12/2022
The Entities should maintain the proper documentation with regards to ESR submissions done for effective ESR period – FY starting on or after 01/01/22019 till Financial Year ending on or before 31st December 2022 as FTA may conduct ESR Audit
To that effect, administrative fines imposed post this effective period shall be ineffective and the authority shall refund the fines paid by the Licensees for fiscal year ending after December 31, 2022. All the grievances filed for fiscal year ending after December 31, 2022 shall be ended. If your entity being a licensee has filed any appeal request or paid any fines pertaining to fiscal years ending after December 31, 2022, such entity shall be eligible for refund towards fines paid and their grievances filed with National Assessing Authority shall be cancelled

With the End of ESR Period, the UAE Entities can now focus on UAE CT Regime and clarifications from the Authority are expected for administrative procedures post ESR Period for Administrative penalties Levied or already paid and ESR Filings done for Post ESR Period