UAE Economic Substance Regulations: Discontinued

Recent changes to the UAE’s economic substance regime were announced pursuant to the publication of Cabinet Decision No. 98 of 2024, which amends certain provisions of Cabinet Decision No. (57) of 2020 on economic substance requirements.

These changes are part of the UAE's ongoing efforts to enhance tax compliance and align with international standards.

Key Changes

1. Cancellation of economic substance: The Ministry of Finance has announced that the economic substance regime no longer applies effective for financial years ending after 31 December 2022. 
2. Abolition of penalties: Cabinet Decision No. 98 of 2024 also includes the abolition of penalties related to economic substance compliance for financial years ending after 31 December 2022. 
3.  Refund of penalties paid: If an economic substance penalty has been paid by a licensee (or exempted licensee) in relation to financial periods beginning after 31 December 2022, the Federal Tax Authority is required to issue a refund to the licensee.

The changes to the UAE’s economic substance regime are expected to streamline the compliance process for businesses in the UAE. However, it is worth mentioning that businesses that are seeking to benefit from the 0 per cent corporate tax rate which applies to Qualifying Free Zone Persons must still maintain adequate substance in the relevant Free Zone and, in the case of distribution activities, in the relevant Designated Zone (being a specific fenced area that has security measures and customs controls in place to monitor entry and exit of individuals and movement of goods to and from the area).  

While licensees are no longer required to submit economic substance notifications or reports for financial years ending after 31 December 2022, they remain responsible for fulfilling compliance obligations for financial years during the period beginning 1 January 2019 and ending 31 December 2022. This includes adhering to information or amendment requests from regulatory authorities or the Federal Tax Authority and paying any penalties imposed in relation to the prior period.

If you have any questions, or need further assistance on this, or any other tax matters, please contact the team below.