Economic Substance Regulations in the UAE
UAE Implements Economic Substance Regulations
The UAE enforces Economic Substance Regulations (ESR) on local businesses, including those in free zones and those engaged in specified ‘relevant activities’. These companies must submit economic substance notifications to regulatory authorities, providing basic information about their activities. This notification is a prerequisite for filing an economic substance report. According to the Cabinet Resolution, companies involved in ‘relevant activities’ must annually submit these notifications and reports. Failure to comply will result in sanctions. These regulations aim to ensure that companies have substantial activities in the UAE and are not just set up to benefit from favorable tax laws.
Activities to Which Economic Substance Regulations Apply
Banking Business
Insurance Business
Investment Fund Management Business
Lease-Finance Business
Headquarter Business
Holding Company Business
Intellectual Property Business
Shipping Business
Distribution and Service Centre Business
Economic Substance Report and Notifications Have to be Submitted Annually
Companies involved in ‘relevant activities’ in the UAE must annually submit economic substance notifications and reports to the regulatory authority, as required by the Cabinet Resolution. If they fail to do so, they will face sanctions.
Submission Deadline
Notifications
A maximum period of 6 months is granted from the end of the financial year.
Economic Substance Reports
A maximum period of 12 months is granted from the end of the financial year.
Guide to ESR return submission in UAE
Businesses under ESR must complete and submit their ESR notification form annually to the relevant regulatory authority. They must also finalize and submit their ESR reports to the same authority within a year after their financial year concludes. If a business hasn’t earned income from Relevant Activities or qualifies for exemptions, it’s exempt from the Economic Substance Test or filing a report, but it still needs to submit a notification form.
Failure to adhere to these rules could result in:
1. Penalties under ESR
2. Sharing of information with foreign authorities
3. Additional consequences such as suspension or cancellation of your trade license.
ESR Penalties in UAE
The penalties for missing the government's deadline to submit the ESR notification and report are significant:
- Failing to submit the ESR Notification with the required documents on time incurs a penalty of AED 20,000.
- Not submitting an Economic Substance Report within the specified period results in a penalty of AED 50,000.
Exceptions to ESR regulations in UAE
Some entities are exempt from ESR regulations in the UAE. These exemptions apply to:
- Entities owned entirely by UAE residents, not part of a multinational group, and operating within the UAE
- Licensees or tax residents located outside the UAE
- Investment funds
- Branches of foreign companies subject to taxation outside the UAE.
Essential Requirements for Passing the Economic Substance Test
To meet the Economic Substance Test, businesses operating in the United Arab Emirates must fulfill key criteria as determined by the National Assessing Authority. These criteria encompass various aspects of the company’s operations:
Core Income Generating Activities: Enterprises must engage in relevant activities such as insurance, banking, investment, budget administration, shipping, lease-finance, intellectual property, and holding firm businesses. These activities are crucial for demonstrating economic substance.
Participation in Board Conferences: Businesses undergo evaluation to ensure they convene and actively participate in an appropriate number of board meetings held in the UAE. Each participant must attend physically and sign the meeting minutes, demonstrating their engagement and compliance.
Competent Administration: Administrators must possess the requisite skills and proficiency to fulfill their responsibilities effectively, contributing to the company’s economic substance.
Maintenance of Full-time Staff: Adequate staffing, physically present in the UAE, is necessary for governing core income-generating activities, ensuring effective management and compliance with the Economic Substance Regulations.
Incurred Costs: Businesses must demonstrate sufficient costs incurred while conducting core income-generating activities. If tasks are outsourced, third-party expenses must also be substantial to meet the requirements of the Economic Substance Test.
Physical Assets: Licensees must possess sufficient physical assets to conduct relevant activities in the UAE. These assets include properties utilized for carrying out business activities, contributing to the overall economic substance of the enterprise.
Why Choose Square International for ESR Assessment & Return Filing in Dubai?
Square International Auditing and Advisory stands out as the optimal choice for ESR Assessment & Return Filing in Dubai for several reasons. Firstly, we ensure timely filing of your ESR notification, sparing you from any potential delays or penalties. Our team comprises proficient professionals including PR experts, lawyers, and tax consultants who offer expert guidance throughout the ESR Notification Filing process. Moreover, we provide comprehensive assistance in determining your eligibility, navigating ESR tests, and maintaining essential documentation. At Square International, we prioritize efficiency and accuracy in every step of the ESR assessment and return filing journey. With our dedicated support, clients can rest assured that their ESR obligations are met seamlessly, allowing them to focus on their core business activities without the burden of compliance concerns. Trust Square International for meticulous ESR services tailored to your specific needs, ensuring compliance and peace of mind.
All you Need to Know about ESR
All you Need to Know about ESR
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All you Need to Know about ESR
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In April 2019, the UAE implemented new economic substance regulations through Cabinet of Minister Resolution No. (31). These regulations aim to enhance the tax framework and ensure companies maintain a real economic presence in the UAE.
Meeting ESR requirements can be challenging, especially for businesses without dedicated in-house teams. Non-compliance can lead to penalties, including fines ranging from AED 20,000 to AED 400,000 or suspension of your UAE license.
Square International Auditing & Advisory offers ESR compliance services to help you avoid these penalties and protect your reputation.
According to section 7701(o)(1), a transaction has economic substance if it meets two criteria: (1) it significantly changes the taxpayer's economic position beyond just Federal income tax effects, and (2) the taxpayer has a substantial, non-tax-related reason for the transaction.
If you fail to submit the ESR Notification along with the required documents by the deadline, you will face a penalty of AED 20,000. Additionally, if you do not submit an Economic Substance Report within the specified timeframe, you will incur a penalty of AED 50,000.
The term “Exempted Licensee” includes various types of entities registered in the UAE that engage in Relevant Activities, such as:
- Investment Funds
- Tax Residents of other countries
- Entities wholly owned by UAE residents
- UAE branches of foreign entities with taxable income
The Economic Substance Test
This legal requirement, known as the Economic Substance Test, ensures that entities can prove their profits in the Crown Dependencies are aligned with their economic activities and substantial presence there.
All local companies in the UAE, whether in free zones or onshore, as well as any resident business entities, must file for ESR.
Economic Substance Notification
The Notification must be filed annually within six months of the Licensee's financial year end. Licensees engaged in one or more Relevant Activities must submit a Notification, even if they qualify for an exemption under the ESR.
Log in to the Ministry of Finance ESR portal and you will be taken to the "Licensee Dashboard - Main Page". Click the “File ESR Report” button to begin the submission process.
The purpose of the ESR is to stop businesses, especially multinational corporations, from artificially shifting profits to low or no-tax jurisdictions without having substantial activities there to benefit from their tax laws. The UAE is one such jurisdiction.