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Amendment to the Economic Substance Regulations

17 October 2024 - The Cabinet of Ministers released Cabinet Resolution No. (98) of 2024, which was published in the Official Gazette on 16 September 2024. This resolution introduces significant amendments to various provisions of Cabinet Resolution No. (57) of 2020, regarding the Economic Substance Requirements (ES Regulations).

As part of the United Arab Emirates’ (UAE) commitment as a member of the Organization for Economic Co-operation and Development (OECD) Inclusive Framework and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued ES Regulations in 2019. These ES Regulations required companies engaged in certain "Relevant Activities" to comply with three key economic tests in the UAE: namely the core-income generating activity test, adequate local substance test, and directed and managed tests.

Amendments to the ES Regulations

  • Scope of Application:

A new article (“2 repeated”) shall be added to Cabinet Resolution No. (57) of 2020 concerning ES Requirements, thereby limiting the applicability of the ES Regulations to the fiscal years starting from 1 January 2019 to the fiscal year ending on 31 December 2022. Consequently, licensees or exempted licensees are no longer required to submit ES notifications and reports for the fiscal year ending after 31 December 2022.

Illustration on the applicability of ES Regulation for the licensees or exempted licensees post the issuance of said amendment: 

  • Administrative penalties:

For the fiscal years ending after 31 December 2022, all administrative fines imposed on licensees or exempted licensees pursuant to the provisions of the ES Regulations shall be cancelled. If any administrative fines were imposed on licensees or exempted licensees, the Federal Tax Authority shall refund those fines and terminate all related appeals.

  • Implementation Directives:

To facilitate the implementation of this decision, the Minister of Finance is tasked with issuing the necessary directives.Please note that the English translation of the Cabinet Resolution is not yet officially published. 

Please note that the English translation of the Cabinet Resolution is not yet officially published. 


Key Takeaways

While the ES Regulations henceforth will not apply to fiscal years ending after 31 December 2022, it is pertinent to note that as per Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (CT Law), the Free Zone Person must maintain adequate substance in Free Zone/ Designated Zone (depending on the Qualifying Activities) to avail the Qualifying Free Zone tax regime. 

Additionally, where a licensee or exempted licensee did not comply with the ES Regulations for the fiscal year ending on or before 31 December 2022, it may still be subject to an administrative penalty/assessment by the Federal Tax Authority. Please note that a six (6) year limitation period applies to administrative penalties under ES Regulations. 

In summary, the licensee or exempted licensee should assess the following:

  • Ensure compliance with ES Regulations for the relevant open period.
  • Determine eligibility for any penalty waivers or refunds following this amendment. Please note that further information on the procedure to initiate the refund of penalties is expected to be issued in due course.

For the Free Zone entity, ensure adequate substance as per the CT Law.


Contacts

We have a dedicated Business Tax team based in the UAE who have in-depth experience and can support you throughout your readiness journey. Please get in touch with one of our tax experts listed on the following page.

You can also contact us and submit all your queries on this email cituae@deloitte.com.

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