Contact
Get In Touch
Author
Abdul Azeem
LLB (Hons) LLM
Understanding Economic Substance Regulations (ESR) in the UAE
Economic Substance Regulations (ESR) were introduced in the UAE in 2019 as a response to global initiatives aimed at combating harmful tax practices. The ESR mandates that UAE entities that undertake certain activities must maintain an adequate economic presence in the UAE relative to the activities they conduct.
Purpose of Economic Substance Regulations (ESR) in the UAE
The primary aim of ESR is to ensure that entities undertaking relevant activities have substantial economic presence and are conducting core income-generating activities within the UAE. This initiative aligns with the global standards set by the OECD’s Base Erosion and Profit Shifting (BEPS) project, which seeks to prevent tax evasion and promote transparency.
Who Requires ESR?
ESR applies to UAE onshore andfree zone companies, branches, partnerships, and other business forms that engage in any of the following “Relevant Activities”:
- Banking
- Insurance
- Fund management
- Finance and leasing
- Headquarters
- Shipping
- Holding company
- Intellectual property
- Distribution and service center
Entities engaged in these activities are required to assess their compliance with ESR and file annual notifications and reports with the relevant regulatory authority.
Guidelines Followed in the UAE for ESR
The UAE has laid down clear guidelines which include the need for entities to demonstrate that:
- Core Income-Generating Activities (CIGA) are being conducted in the UAE.
- The entity is directed and managed in the UAE concerning the activity.
- There is an adequate number of qualified full-time employees who are physically present in the UAE.
- There is sufficient operating expenditure incurred and adequate physical assets in the UAE.
Registration Process for ESR
- Notification: Entities must notify their respective Regulatory Authority whether they are conducting a relevant activity and if they are subject to ESR for the financial period.
- Report Submission: Entities that undertake relevant activities and earn income from those activities during the financial period must submit an annual Economic Substance Report. This report should provide detailed information on the type of activity conducted, amount and type of income, operating expenses, and the number of full-time employees, among other details.
- Compliance and Penalties: Entities must maintain records to demonstrate the economic substance in the UAE. Non-compliance with ESR requirements can lead to penalties, spontaneous exchange of information with foreign tax authorities, and potential suspension, revocation, or non-renewal of registration.
Your Legal Solution Starts Here
Facing a legal challenge? 24Justice is your trusted partner. Our platform provides access to expert lawyers across various legal areas. From property disputes to complex litigation, we offer comprehensive legal solutions tailored to your needs. Start your journey towards peace of mind today.