Economic Substance Regulations (ESR) in UAE
Economic Substance Regulations (ESR)
UAE has been recently introduced, and as a result, all UAE businesses that may be subject to these regulations should be prepared to take action and ensure compliance.
This legislation (collectively, referred to as the “Economic Substance Regulations “) was issued in response to the UAE’s inclusion in the European Union’s list of non-cooperative jurisdictions for tax purposes, and their aim is to facilitate tax transparency and fair tax competition in the UAE.
The regulations highlight the regular recording, tracking and reporting of all the economic activities carried out by legal entities in the UAE, including companies, branches and subsidiaries, as well as those based in any of the free zones in the UAE.
The UAE’s ESR requires businesses to assess whether the newly introduced regulations apply to them. Businesses that are able to demonstrate that they are carrying out substantial economic business activities within the region are considered relevant and need to implement strategies in preparing for the notification and reporting requirements prescribed by their relevant Regulatory Authority.
The UAE Ministry of Finance has issued an ESR Notification template, which all legal entities must complete, unless as prescribed otherwise by the relevant Licensing Authority, to notify and report to their relevant Regulatory Authority whether or not they undertake and generate income from the list of relevant activities.
The Notification must be submitted by the deadline set by the Ministry of Finance, or they will risk fines and administrative penalties.
Economic Substance Notification
The Economic Substance Regulations apply to juridical (legal) persons, including all UAE onshore and free zone companies and partnerships (referred to as “Licensees “) that carry out one or more of the following “Relevant Activities” in the UAE:
- Banking businesses
- Insurance businesses
- Investment fund management businesses
- Lease-finance businesses
- Shipping businesses
- Headquarters businesses
- Holding company businesses
- Intellectual property businesses
- Distribution and service center businesses
Economic Substance Compliance Requirements Under the Regulations?
All licensees (either onshore, offshore or in a free zone) must comply with the Economic Substance Notification & Return Filing obligations. In order to demonstrate substantial economic substance, a company needs to review its corporate governance structures and operating models and make relevant changes where possible. The compliance requirements imposed on UAE companies under the Regulations are as follows:
- The company must perform its core income-generating activities (CIGAs) in the UAE.
- The company must be directed and managed within the UAE in relation to the its business activity, evidencing that company holds board meetings and annual general meetings, with a quorum of directors and shareholders physically present in the UAE.
- The company is required to have an adequate number of full-time employees, incur operating expenditure, and have physical assets for carrying out the relevant business activities in the UAE.
- The company must be able to demonstrate that it controls the execution of activities that have been outsourced to third parties.
ESR & Return Filing
All UAE companies (onshore, offshore or Free Zone) that hold a license and carry out any of the ‘Relevant Activities’ during the year, have to file a notification unless as prescribed by the relevant Licensing Authority, as per the template prescribed by the relevant Licensing Authority.
The regulation prescribes what must be included in the notification form:
- Whether the company carries out relevant activities.
- A description of the relevant activities conducted by the company and the type of income from those activities.
- Whether the income earned from core income-generating activities (CIGAs) is taxable in a jurisdiction outside the UAE.
- If the licensee is a tax resident outside the UAE, and if so, where.
- Whether at least 51% of the business is owned, directly or indirectly, by the Federal or an Emirate Government, or a UAE Government body or authority.
- The first reportable financial year the business is subject to.
A company carrying out relevant activities must submit an Economic Substance Report annually to the Regulatory Authority to evidence that the company satisfies the economic substance requirements. The Economic Substance Report should include:
- The value and type of income earned from the relevant activities.
- The location of the activities and the property and/or equipment used to conduct the activities.
- The number of employees, their qualifications, and the number of people responsible for conducting the activities.
- A disclosure stating that the company has met the economic substance requirements.
Penalties and Fines
Failure to comply with the Economic Substance Regulations (ESR) or providing incomplete or inaccurate information may result in an administrative fine of between AED 10,000 and AED 50,000 during the first fiscal year. For subsequent fiscal years of non-compliance, the business can be fined between AED 50,000 and AED 300,000. Licensing authorities may also suspend, revoke, or deny renewal of your commercial license if the fines are unpaid.
