Economic Substance Regulations

Economic Substance Regulations (ESR) were introduced globally, particularly in countries with low or no corporate taxes, as part of the Organization for Economic Co-operation and Development's (OECD) initiative to address tax avoidance. The OECD's 15 Action Plan on Base Erosion and Profit Shifting aimed to combat harmful tax practices and close gaps in tax rules that allowed for avoidance. Over 135 countries, under the OECD/G20 Inclusive Framework on BEPS, collaborated to eliminate strategies exploiting tax rule gaps. ESR requires specific legal entities, such as those in free zones, to demonstrate substantial economic activities within low-tax jurisdictions. The regulations were implemented to curb unlawful tax practices, becoming effective in the UAE on January 1, 2019. As a member of the OECD Inclusive Framework, the UAE commits to aligning its legal and commercial framework with global standards. The OECD reviews these standards' implementation in the UAE to ensure compliance.