In 2019, the UAE introduced its first Economic Substance Regulations (ESR) to align with international efforts aimed at combating harmful tax practices, including unlawful tax avoidance and evasion. The ESR required certain legal entities to demonstrate substantial economic activities in compliance with these regulations.
Entities were obligated to submit notifications (for licensees and exempted licensees) within six months of the end of their financial year and also required to submit a detailed report within twelve months following the end of each financial year. Failure to meet these deadlines could result in significant penalties imposed by the Federal Tax Authority, ranging from AED 20,000 to AED 400,000.
On September 16, 2024, the UAE issued Cabinet Decision No. 98 of 2024, published in Official Gazette Issue number 783. This decision amends key provisions of Cabinet Decision No. 57 of 2020 concerning the Economic Substance Regulations.
The recent Cabinet Decision No. 98 of 2024 introduced major changes to the ESR framework in the UAE:
- ESR notifications and reports are no longer required for financial years that commenced after December 31, 2022.
- No penalties will be imposed on entities that failed to meet ESR filing deadlines for financial years starting after December 31, 2022.
- Any penalties already paid by licensees or exempted licensees for financial years beginning after December 31, 2022, will be refunded. The process for these refunds has yet to be specified and will be detailed by the Minister of Finance in future legislation.
This move to render ESR provisions redundant is closely linked to the introduction of Corporate Tax (CT) regulations. As the UAE integrates its economic policies with global tax standards, the new CT rules now encompass economic substance provisions, making separate ESR filings unnecessary.
While the professional community has awaited the incorporation of CT and ESR, this development is a positive step. The UAE government aims to reduce the administrative burden on businesses while ensuring compliance with international tax frameworks. This shift aligns with the UAE’s broader goal of maintaining its status as a global business hub while adhering to international transparency standards.
