More companies than ever are moving into the UAE area because of corporate-friendly tax schemes. However, as an offshore management company, there are some key considerations about doing business in the UAE. A key factor is economic substance regulation. Every offshore management company should be aware of the economic substance regulations.
What Are Economic Substance Regulations?
In 2019, the Cabinet of the United Arab Emirates Ministers presented Resolution 31. The economic substance regulations or Resolution 31 for the UAE were designed to apply to specific sectors of business in the UAE. The resolution was designed with recommendations from the Economic Cooperation and Development and the EU Code of Conduct group. The goal was to counter tax practices that were coined “harmful”.
The ESR is designed to provide a set of regulations that will affect an offshore management company. These rules ensure that companies are compelled to provide information about profits and economic impact by their presence in the area. ESR regulations affect offshore, onshore, and Freezone business activities.
Since the declaration of these rules in 2019, entities are required to demonstrate economic substance in the jurisdiction overseen by the UAE or risk losing tax entitlements and other benefits. As an offshore management company, violating Resolution 31 is not an option because it can result in great financial loss.
Who Does ESR Affect?
It is not only an offshore management company that has to contend with the ESR resolutions. There is a wide range of industries that should be aware of these laws and understand how to navigate them successfully. Here is a shortlist of some of the industries that are expected to be in compliance with the ESR if they are going to do business in the UAE jurisdictions:
- An offshore management company, shipping concerns, distribution centers
- Corporate headquarters business, lease financing, banking businesses, insurance businesses.
- Holding businesses, intellectual property businesses, and other businesses.
The best way to determine if these rules will apply to you is to ask. Getting in-depth information about ESR will help you to make informed decisions about whether the rules apply to you. A good rule of thumb is to assume that it does.
Substance Over Form
The UAE uses a substance over form approach to determine which company these rules apply to and which company they do not apply to. The UAE will use a Relative Activity guide to determine if these rules are applicable to your business. The UAE will make the decision about the applicability regardless of whether relevant activities are included in your application.
If the UAE determines that your business does fall under the ESR requirements, you will need to provide the economic substance of the company. If you cannot show the economic substance of your company, you may be denied the ability to do business in the UAE.
Companies That Are Excluded from ESR
There are businesses that are not affected by the ESR. For example, businesses that are non-UAE residents, investment fund companies for special purpose vehicles, businesses that are fully owned by UAE residents, foreign companies where incomes are subject to tax in foreign countries, businesses that generate zero income, and other businesses. There are loopholes that an offshore management company can use to be exempt from these rules.
Economic Substance Tests
There are several tests that you can do to see if your company meets the standard of an ESR company. The first test, of course, is if the business carries out relevant activities that are managed in the UAE. Another test is whether the Core Income Generating Activities are carried out in the UAE. Another test is if there are enough employees, enough expenditures in the UAE, and physical assets.
There are other tests and criteria that need to be considered as well. The good news is that there are consultants that are available that can help your offshore management company manage the ESR in the UAE. A consultant can manage the entire process for you. Learn more today about ESR in the UAE.