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 and free 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:

  1. Core Income-Generating Activities (CIGA) are being conducted in the UAE.
  2. The entity is directed and managed in the UAE concerning the activity.
  3. There is an adequate number of qualified full-time employees who are physically present in the UAE.
  4. There is sufficient operating expenditure incurred and adequate physical assets in the UAE.
Registration Process for ESR
  1. 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.
  2. 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.
  3. 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.

Contact us for more information

Compliance with ESR is crucial for entities operating in the UAE, especially those engaged in any of the specified relevant activities. It is essential not only to avoid the stringent penalties associated with non-compliance but also to reinforce the UAE’s commitment to global tax transparency and combating offshore tax avoidance.

Entities are encouraged to consult with ESR experts to ensure they understand and meet all requirements, thereby securing their business operations and reputation in the UAE market. To contact our team about this, simply message us on WhatsApp or fill out the form below and a member of our team will reach out to you.

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