The United Arab Emirates issued the Economic Substance Regulations (ESR) in 2019 under Cabinet Decision No. 57 of 2020 for entities that are engaged in any of the Relevant Activities. The program was intended to tackle tax evasion by companies and increase transparency, thus maintaining the economic substance in the country. In this guide, we will learn about the main ESR requirements such as ESR notification and ESR Report in UAE, including a reminder of important deadlines.
Economic Substance Regulations (ESR)
The Economic Substance Regulations (ESR) is a set of regulations that prove the significant economic presence of the entities in the country by carrying out real economic activities and maintaining adequate levels of staffing, expenditure, and physical presence. These regulations apply to all companies that are registered in the UAE including foreign companies that carry out the specified activities within the UAE.
The entities are required to prepare the ESR Report in UAE and actively fulfill the annual filing requirements in order to avoid risk penalties for non-compliance.
Activities subject to ESR
Entities engaged in any of the stated activities will be subject to ESR:-
- Banking
- Insurance
- Investment Fund Management
- Shipping
- Lease-Finance
- Headquarters
- Holding Companies
- Distribution and Service Centers
- Intellectual Property
Entities conducting any of the above activities are required to prepare and submit an ESR Notification and Report to the Ministry of Finance (MoF).
Deadlines for ESR Notification and Reporting for 2024
The deadline to submit the ESR Report in UAE for the Financial year-end 31st December 2023 is 30th June 2024. Hence, companies need to finalize their report as soon as possible, without any delay. Any failure to meet the compliance requirements may result in hefty penalties (from AED 20,000 to up to AED 4,00,000 approx) or even termination of business activities in the UAE.
The tax advisors at Shuraa Tax can provide personalized guidance on ESR filing UAE and assist you in accessing the ESR framework of your company and accordingly preparing and submitting the ESR Report in UAE.
Economic Substance Regulations Legislation
The ESR is incorporated in the following legislations:-
- Cabinet Resolution No. 31 of 2019 on the Specification of the Requirements of the Real Economic Activities
- Ministerial Decision No. 215 of 2019 on the Issuance of Directives for the Implementation of the Provisions of Cabinet Decision No. 31 of 2019
- Cabinet of Ministers Resolution No. 57 of 2020 Determining the Economic Substance Requirements
- Ministerial Decision No. 100 of 2020 on the Issuance of Directives for the Implementation of the Provisions of Cabinet Decision No. 57 of 2020 Concerning Economic Substance Requirements.
Purpose of ESR UAE
ESR was implemented to prevent businesses, usually multinational corporations, from evading taxes. It imposed an obligation on companies to annually submit a comprehensive report to the authorities to validate that their business has substance and legitimate operations in the UAE.
ESR Compliance Obligations
ESR Notification
The Ministry of Finance requires companies carrying out one or more Relevant Activities to file a notification on an annual basis. The key purpose of this is to confirm whether it engaged in the Regulated Activities and generated an income from them during the reportable period. Most importantly, the Notification needs to be filed annually, within six months from the financial year-end of the company. The requirements for ESR notification filing are as follows:-
- The nature of the main income-generating Activity
- The gross income generated from the core activity
- The financial year-end date of the Relevant Activity
- Additional evidence as required by the regulatory authorities
It is important to note that businesses that fall within the scope of exemptions under the ESR but undertake one or more Relevant Activities are also required to submit a Notification.
ESR Submission Tests
Businesses that are earning income from any Relevant Activities in the UAE are required to exhibit adequate substance relating to such activities. There are three ES tests to do so –
- Core Income Generating Activity (CIGA) test – Requires entity to perform the core activities in the UAE
- Directed and Managed test – Requires that the business must be directed and managed from the UAE
- Adequacy test – Must have adequate resources such as employees, expenses and assets, etc. in the UAE
Holding companies are subject to limited ES Tests, while High-risk Intellectual Property entities have to go through intensified ES Tests. Additionally, businesses are required to carefully review the facts and considerations for appointing alternative directors and accordingly document them.
ESR Reporting
Businesses earning income from any Relevant Activity are required to file an ESR Report in UAE on the online portal of MoF within 12 months of the financial year-end proving that they fulfill the requisites of the Economic Substance Test. Additionally, this particular step requires disclosure of various details, such as:
- Whether the company has met the ES Tests
- Details of the outsourced service provider (as required)
- Details of CIGAs conducted
- Operating costs and number of full-time staff for each Relevant Activity
- Details of the parent, ultimate parent, and ultimate beneficial owner
Nevertheless, there are certain categories of entities that are exempt from ESR Reporting but are still subject to ESR Notifications filing:-
- Entities entirely owned by UAE nationals or UAE resident individuals that operate solely within the UAE
- Investment funds or an investment holding company of investment funds
- Special purpose vehicles
- Businesses that are tax resident in a jurisdiction other than the UAE (They are required to issue a certificate affirming their taxability in the foreign jurisdiction)
- Foreign company branches whose income is subject to tax in the jurisdiction of the parent company
If the exempted entities fail to provide adequate evidence to validate their exemption status, the authorities change their status to a non-exempt entity.
ESR Compliance in the UAE
Shuraa Tax and Accounting Consultants has a large team of tax experts who offer the best management consulting services and extensive support to clients in their ESR matters. In addition, they can assist with ESR filing UAE and compliance in the following ways –
- Assess whether the business activities carried out by the company fall under any of the Relevant Activities and if any exemption can be employed.
- Assist in filing of ESR notification
- Confirm whether the Economic Substance Tests are duly met and advise on the maintenance of the documentation to defend any future inquiries from the authorities
- Assist in filing the ESR report in UAE and other supporting documentation, if any
- Identify gaps between existing substance and the required level of substance in accordance with the ESR and recommend corrective measures
- Assist during inquiries from the regulatory authorities
Conclusion
Thus, UAE businesses need to assess their eligibility to file a Notification and an ESR Report in UAE based on the Relevant Activities they perform and the generated income. This will help them avoid the risk of fines and legal penalties.
Shuraa Tax is one of Dubai’s leading audit firms that offers outstanding and distinctive audit reporting services and a wide range of other professional services as required by the clients. For instance, corporate tax, company liquidation, internal audit, liquidation audit, tax residency certificate, due diligence audit, company registration, bank account opening, and many more.
For any further queries on ESR or its application to your business, get in touch with the experts at Shuraa Tax.
