New tax regime could be a speed-breaker for Indian companies having presence in UAE

Ravi Mehta and Amrita Bhatnagar | Updated on September 13, 2021

UAE has agreed to the OECD’s framework on adoption of BEPS project

Indian companies — both start-ups and established ones — prefer the UAE for their initial phase of international expansion. Globally, UAE is one of the most favoured countries of a businessman. However, Indian companies operating in the UAE will be impacted by the recent tax implications. UAE, amongst the other 130 countries, has agreed to the Organization for Economic Co-operation and Development’s (OECD) framework to adopt the Base Erosion and Profit Shifting (‘BEPS’) project, as one of the anti-abuse tax measures.

The main purpose of this regulation is to ensure that UAE entities that undertake the defined relevant activities are not used to artificially attract profits or save tax that are not commensurate with the economic activity undertaken in the UAE (i.e., a measure to segregate and highlight activities which are in form undertaken in UAE but in substance are not undertaken in UAE).

For a world-wide coverage of the project, the European Union has published a list of non-cooperative jurisdictions (such as low tax/ zero tax jurisdictions such as BVI, Cayman Islands, The Bahamas, The Channel Islands, Mauritius, United Arab Emirates) for tax purpose and negotiated with them to adopt OECD model. The intention is to combat tax avoidance by multinationals who are shifting profits from high-tax jurisdictions to entities in low/zero tax jurisdictions without adequate economic substance.

Economic Substance Regulations (ESR) shall apply to all companies in UAE whether onshore, free zone companies, branches, partnerships, or any other business forms that have a licence to carry on business activity in UAE.

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The regulations impose economic substance requirements on any UAE-based entity regardless of whether the UAE entity belongs to a foreign multinational group. However, licensees that are directly or indirectly owned by at least 51 per cent by the Federal or an Emirate Government, or a UAE Government body or authority, are exempt from the Regulations. Relevant activities are defined under the regulations to include various business activities viz, banking, insurance, investment fund management, lease finance, shipping, etc.

Impact of regulations

Under Common Reporting Standards (‘CRS’), information of all Financial Institutions in UAE is furnished to the relevant Foreign Competent Authority (FCA). Further, under bilateral international agreement for exchange of information with various countries based on the request from FCA, requested information is furnished to the relevant FCA.

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As per the regulation, if any licensee fails to meet the Economic Substance Test, the competent authority of UAE shall unilaterally report to the relevant FCA. However, in case of high-risk intellectual property business, the competent authority of UAE shall always report to the FCA i.e., even if the licensee meets the Economic Substance Test.

Though sharing of information under ESR is stringent on the competent authority of UAE, the FCA continues to be bound by confidentiality clause. Hence, the information shared with the FCA can only be used for carrying out obligations as per the bilateral agreement or during court proceedings.

The relevant FCA for a licensee shall be decided based on the country/territory in which the ultimate beneficial owner of the licensee/ultimate parent company resides. If licensee is outside the state, then FCA of the country where licensee was incorporated.

Failure by the Licensee to comply with the Regulations including failure to meet the Economic Substance Test (‘ESR Test’), may result in administrative penalties, unilateral exchange of information with the FCA and potential suspension, revocation, or non-renewal of license to operate in UAE.


UAE has come up with one of the most stringent ESRs to fight against the dearth of information collected or available with the competent authority of UAE and against the fear of being blacklisted on the global level. Hence, the ESR Notification is just a mode of collecting initial information of licensees and their activities in the UAE and the Economic Substance return is a mode to collect detailed information of licensee having income in UAE, which will all be collated to be made available to FCA.

Even if ESR is a highly welcome regulation, for collection and dissemination of information and increase global transparency, ESR may not be highly welcome regulation for a licensee, who is used to perceiving UAE as one of the favoured jurisdictions. It will now be forced to disclose in UAE its global operation, prove its presence in UAE, run the risk of not meeting ESR test and fear of global reporting of the test result.

Ravi Mehta is Managing Director & Head, Transaction Tax, at RBSA Advisors and

Amrita Bhatnagar is Associate Director at RBSA Advisors. The views expressed are personal.

Published on September 13, 2021

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