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Economic Substance Test in the UAE

MEDIA / Articles / Economic Substance Test in the UAE
The Economic Substance Regulations were first adopted by the UAE in April 2019; they were later modified by Cabinet Resolution 57 of 2020 (ESR) and Ministerial Decision 100 of 2020.

Almost all private enterprises in the UAE now have to comply with a variety of reporting obligations that were introduced by the relatively new rules. Despite its relative youth, the Ministry of Finance has already begun fining businesses severely for failing to comply with the rules.

The Economic Substance Test outlined in Article 6 of the ESR will be used by the Ministry of Finance when imposing these fines. A business must essentially show that:
  1. The company carries out the crucial core revenue-generating operation inside the UAE;
  2. The company is directing and managing the relevant activity in the UAE;
  3. The company has enough resources (workers) present in the UAE.
According to the laws, an entity must prove that the pertinent activity is "directed and controlled" in the UAE. A sufficient number of board meetings must be held and attended in person by directors in the UAE for a relevant activity to be "directed and managed" there.

Companies can be fined due to failing to pass the "directed and managed" standard, ostensibly because there was no proof that the business (a subsidiary of a bigger group) held meaningful board meetings. The "cosmetic" board meetings that were held to pass this criteria may not have been enough to persuade the Ministry of Finance that the company was being run and controlled in the UAE.

The UAE Ministry of Finance is anticipated to enhance its oversight of businesses with offices there as the country develops into a major financial hub.

This article's information is meant to serve as a general introduction to the topic. Please seek specialized guidance regarding your unique circumstances.

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