How Uae Industries Adapt To Economic Substance Regulations

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A global business hub, the UAE draws many multinational corporations and investors who want a strategic location for their activities. To meet international standards and increase transparency, the jurisdiction has introduced economic substance requirements and regulations. The goal was to enhance the transparency and credibility of the UAE's tax system and to prevent the erosion of other jurisdictions’ tax bases These standards also aim to attract genuine business activities and investments to the UAE, while supporting the country’s economic diversification and development. However, their implementation has significantly impacted certain sectors. Below, we will see what industries in the UAE are most affected by the above regulations and look into the challenges and opportunities that have arisen as a result.


Financial services and banking

As of early 2024, the finance and banking sector in the UAE is stable, profitable, and resilient, despite the challenges of the global economic environment and the OPEC-agreed oil production cuts. The UAE banks benefit from strong capital buffers and good funding profiles. Due to its intricate nature and susceptibility to international tax avoidance, the financial services sector in the Emirates is among the most affected by UAE ESRs. Companies engaged in banking, insurance, and investment management are now under increased scrutiny. The challenge lies in demonstrating the presence of substantial activities in the UAE, leading many financial institutions to reassess their operational structures.

Challenges: Striking a balance between global operations and satisfying the ESR criteria poses a challenge for multinational financial firms. For them to meet the ESRs without disrupting international operations demands careful strategic planning.

Opportunities: This regulatory shift prompts financial institutions to streamline their operations and enhance efficiency. Establishing a strong presence in the UAE can not only ensure compliance but also open doors to a growing market.

Shipping and logistics

The UAE, with its strategic location, is a draw for shipping and logistics companies. The local shipping and logistics sector is a thriving industry that connects markets across continents. The Emirates leverages its strategic location, modern infrastructure, and advanced logistics to be a vital link for global trade and transportation. The sector also adopts technology to improve efficiency in operations, tracking, and supply chain. Regrettably, the industry also faces challenges under ESRs. In particular, this is true for holding and leasing companies. The emphasis on substantive activities has led to a reevaluation of business models in the UAE shipping and logistics sector.

Challenges: Meeting the economic substance requirements while maintaining a global logistics network is a delicate balancing act. Companies in this industry have to handle complexities to ensure their operations align with the regulations.

Opportunities: Investing in infrastructure and expanding local operations can position shipping and logistics companies for compliance. Moreover, the demand for logistics services in the region presents growth opportunities.


Oil and gas

The oil and gas sector in the UAE remains a cornerstone of the nation's economy, contributing significantly to its prosperity. Despite the global push towards renewable energy, the UAE continues to strategically leverage its abundant hydrocarbon resources. With a commitment to sustainable practices, the sector has undergone a transformation, embracing technology and diversifying operations to reduce environmental impact. However, it is not immune to the impact of ESRs as well. Just like lots of other businesses, exploration, extraction, and production companies in the energy sector need to justify their presence and operations in the UAE.

Challenges: Balancing global energy operations with local compliance is a complex task. The capital-intensive nature of the industry requires careful consideration of the economic substance requirements.

Opportunities: The ESR push provides an impetus for oil and gas companies to invest in local infrastructure and technology. Diversifying operations to include more value-added activities within the UAE can lead to improved compliance.

Technology and intellectual property

In 2024, the technology and intellectual property sector in the UAE stands at the forefront of innovation, reflecting the nation's commitment to becoming a global tech hub. It has experienced remarkable growth, with companies focusing on research and development, digital transformation, and intellectual property creation. Yet, the industry, which often relies on intellectual property as a key asset, encounters challenges under ESRs. Companies involved in IP holding and licensing activities are required to demonstrate genuine business operations within the UAE to comply. 

Challenges: Defining and proving substantial activities for technology companies, which often operate in a virtual and borderless environment, is a challenging task. To handle the nuances of ESR without hindering innovation is a significant challenge as things stand.

Opportunities: Investing in research and development (R&D) centers and expanding tech operations locally can not only guarantee compliance but also foster innovation and collaboration within the UAE.

Real estate and construction

With a focus on sustainable development, innovation, and aesthetic appeal, real estate companies have played a pivotal role in shaping modern urban landscapes across the UAE. The integration of smart technologies and eco-friendly practices has become increasingly prevalent, aligning with global sustainability goals. Yet, just like many other businesses, companies engaged in real estate development, construction, and property management in the United Arab Emirates may face challenges under ESRs. In particular, holding and leasing activities will require close scrutiny to ensure compliance.

Challenges: Balancing international real estate portfolios with local economic substance requirements poses challenges for real estate and construction companies.

Opportunities: Investing in local construction projects and developing a substantial presence within the UAE can open doors to the booming real estate market and potentially ensure compliance.

Healthcare and pharmaceuticals

The healthcare and pharmaceutical industries, particularly companies involved in research, development, and manufacturing, are also likely to encounter challenges under ESRs. The emphasis on substantive activities requires a reevaluation of operational structures.

Challenges: For companies in this sector, it may be challenging to deal with the complexities of international healthcare operations while meeting local economic substance requirements.

Opportunities: Investing in local healthcare infrastructure, research facilities, and manufacturing plants can position companies for compliance and tap into the growing healthcare market in the UAE.

Although complying with ESRs may seem complicated, it has the potential to boost your business reputation in the UAE. With expert assistance from International Wealth, we hope you can overcome this challenge with confidence. To achieve your UAE business goals, check this link or contact our team without further delay!

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