The United Arab Emirates (UAE) introduced ‘Economic Substance Regulations’ (ESR or the Regulation) in April 2019. The primary objective of the Regulation is to restrict the operation of shell/ paper companies in UAE who earn significant profit without carrying out in corresponding activity. In other words, covered licensees are required to demonstrate/ explain that they are genuinely undertaking a certain economic activity, which resulted in income/profits in the UAE. In the absence of an income tax regime, the UAE was traditionally recognized by multinationals to shift their profits to reduce overall tax for the group. While the UAE is known as a distribution hub, it is also famous amongst the multinationals to carry out financing/ structuring their models. With ESR in place, the multinationals are compelled to re-evaluate their existing operational model in order to be compliant with this Regulation.
