The Economic Substance Regulations (ESR) were implemented to counteract the practice of businesses, particularly multinational corporations, artificially shifting profits to jurisdictions with low or zero corporate taxes to reduce their tax liabilities in their home countries. This often involves setting up shell companies in low-tax jurisdictions without any substantial operations, solely for tax avoidance.
Timeline of ESR Deployment in the UAE:
- April 2019: Resolution 31 (2019) of the Cabinet of Ministers regarding economic substance (“Resolution 31”).
- September 2019: Cabinet Decision No. 31 of 2019 and Ministerial Decision No. (215) of 2019 providing directives for implementation (“Resolution 215”).
- August 2020: Resolution 57 (“Resolution 57”) by the Cabinet of Ministers, repealing and replacing Resolution 31.
- August 2020: Resolution 215, which repeals and replaces Ministerial Decision No. (100) of 2020 on the issuance of directives for implementing the provisions of Cabinet Decision No. 57 of 2020 concerning ESR.
Resolutions 57 and 100 currently govern ESR regulations in the UAE. As a member of the OECD, the UAE adheres to principles aimed at preventing harmful tax practices, thereby fostering global trade and economic advancement. ESR is one such preventive measure, demonstrating the UAE’s commitment to international standards.
Under ESR, corporations and their transactions must have genuine economic substance and serve a legitimate purpose beyond tax minimization to comply with regulations. The Federal Tax Authority in the UAE employs this principle to assess whether UAE-based businesses engage in tax avoidance or abusive practices.
By enforcing ESR laws, the UAE reinforces its stance against aggressive tax planning and promotes fair taxation practices, ensuring a level playing field for businesses operating in the country.