Economic Substance Regulations (ESR) in UAE: A Simplified Guide for UAE Businesses
The implementation of the Economic Substance Regulations in the UAE, commonly referred to as ESR, took effect on April 30, 2019, through Cabinet of Minister Resolution No. (31) of 2019.
- UAE ESR Compliance
- Future-Proof Your Business
- Compliance Advantages
- Minimize Risks, Maximize Rewards
The Objective of the Economic Substance Regulations (ESR) is to prevent non-domiciled directors, who have registered and operate companies in the UAE, from avoiding taxes in their home countries. This initiative is crucial for the UAE to avoid being blacklisted as 'non-cooperative' by the EU, thereby fostering a more equitable and favorable business environment.
Regardless of how you establish your business, it is important to be informed about the UAE's Economic Substance Regulations. Essentially, your company must be managed or directed within the UAE, maintain an adequate number of full-time staff based in the UAE, generate the majority of its income within the UAE, possess sufficient assets in the UAE, and demonstrate operating expenditure in the country.
What is Economic Substance Regulation (ESR) in UAE?
As of August 10, 2020, a new Economic Substance Regulation (ESR) was introduced through Cabinet Resolution 57/2020, effectively replacing and revoking Cabinet Decision no. 31/2019. Simultaneously, Ministerial Decision No. 100 for the year 2020 superseded Ministerial Decision 215 for the year 2019.
Entities are now obligated to adhere to Cabinet Resolution 57/2020 and Ministerial Decision 100 for the year 2020, which provide directives for the implementation of the provisions outlined in Cabinet Decision no. 57/2020.
Subsequently, in August 2020, the UAE Ministry of Finance issued Ministerial Decision No. 100 of 2020, featuring a Relevant Activities Guide. This guide assists in determining if a business conducts relevant activities falling within the scope of the ESR or qualifies as an Exempted Licensee under the Amended ESR. The regulation aims to combat harmful tax practices while aligning with global standards, applying to all UAE jurisdictions, including free zones. Given the novelty of this regulation, businesses may find the ESR filing process confusing. Seeking guidance from experienced ESR return submission consultants, such as Smart Zones® UAE, is advisable. These consultants stay updated on government announcements and clarifications regarding ESR.
Economic Substance Reporting & Notification in the UAE
Companies in the UAE engaged in relevant activities are required to annually notify the regulatory authority. The notification must include details about:
- Whether they are conducting a relevant activity in the UAE
- Whether any income is subject to taxation outside the UAE
- The financial year's end date
These companies are obliged to submit an annual report to the Regulatory Authority, demonstrating their engagement in relevant activities. The report must include details about the activity, income, expenses, and assets, confirming compliance with the UAE economic substance test. Submission of the report to the Authority is mandatory within 12 months from the end of each financial year.
UAE Economic Substance Requirements
Before the conclusion of a financial period, companies must take various significant actions, including:
- Evaluating the Relevant Activities conducted during the financial period using a substance-over-form approach
- Assessing the amount and type of income generated from the Relevant Activity during the financial period
- Conducting Board Meetings with physically present directors in the UAE
- Recording and maintaining board meeting minutes in the UAE
- Determining the amount and type of expenses and UAE-based assets related to the Relevant Activity
- Ensuring that access to assets can be substantiated through agreements and financial records
- Determining the number of full-time employees (UAE-based) overseeing the Relevant Activities
- Demonstrating control and supervision of any outsourcing arrangements
Who falls under these regulations?
The regulations establish a reporting framework applicable to companies and/or licensees engaged in the "Relevant Activities" These activities include:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease – Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business (“IP”)
- Distribution and Service Centre Business
The implications of the Economic Substance Regulation can only be assessed on a broad scale. Annually, entities falling under the definition provided by the resolution must furnish specific information to the relevant regulatory authority regarding their relevant activities. Entities engaged in a relevant activity are obligated to submit reports in accordance with the regulations, altering the way they conduct business in the United Arab Emirates.
By disclosing the value of revenues and costs from each function, the Regulatory Authority gains insights into the performance of each entity. This prevents companies from shifting profits without contributing to local economic activities. The impact extends to Multi-National Company groupings as they now need to document the management, supervision, and number of employees involved in Relevant Activity. Such groups, in pursuit of their objectives, often employ third parties. To ensure compliance with regulations, they must adapt their governance model to accommodate changes reflecting the UAE's requirements for economic substance.
Penalties of Non-Compliance with UAE Economic Substance Reporting
Failing to adhere to the Economic Substance Test Reporting Regulations may result in various measures and penalties imposed by authorities in the UAE. Companies failing to comply may face fines ranging from AED 10,000 to AED 50,000 if they:
- Fail to provide notification
- Fail to furnish accurate or complete information
- Fail to demonstrate economic substance in the UAE
- Fail to demonstrate sufficient economic substance in the UAE for the relevant Financial Year
Repeated failure to demonstrate economic substance in the UAE may lead to a fine of up to AED 30,000. Additionally, persistent non-compliance may result in actions such as the suspension, withdrawal, or non-renewal of the trade license.
Exceptions to ESR regulations in UAE
The ESR Regulations exclude certain forms of entities from the requirement to meet the Economic Substance Test, subject to meeting certain conditions, this exemption is available to:
- Investment funds
- A Licensee that is Tax Resident outside of the UAE
- A Licensee that is fully owned by one or more UAE Resident and meets the following conditions:
- the entity is not a part of the MNE Group
- all of the entity’s activities are only carried out in the UAE.
- A Licensee that is the branch of a foreign entity the Relevant Income of which is subject to tax in a jurisdiction other than UAE.
- An entity claiming an exemption is only required to submit a notification with all the necessary supporting documentation.
How Smart Zones® UAE Can Help You to Filing Annual Economic Substance?
This legislation mandates eligible companies to prove their substantial presence in the country. We will assess whether your company falls under the purview of the Economic Substance Laws and provide guidance on the corresponding compliance obligations that must be met.
Smart Zones® UAE can conduct a comprehensive and detailed assessment of the company's existing status in accordance with the Economic Substance Regulations. We can offer recommendations, as necessary, to ensure compliance with the law.
Smart Zones® UAE aids all entities obligated to submit an annual notification to the relevant regulatory authorities, declaring their activities for the preceding financial year. We support in filing the notification within the timeframe, format, and method approved by the relevant Regulatory Authority.
Smart Zones® UAE offers support for the filing of the Economic Substance Return with the relevant regulatory authorities to declare your economic substance in the UAE. This process will be carried out in the format and manner approved by the relevant regulatory authority.
Looking for a seamless business setup experience? Trust Smart Zones® Dubai to pave the way.
The ESR aims to prevent non-domiciled directors, operating companies in the UAE, from evading taxes in their home countries. This initiative is crucial to avoid the EU blacklisting the UAE as (non-cooperative,) fostering a more equitable business environment.
Introduced on August 10, 2020, ESR via Cabinet Resolution 57/2020 replaced previous decisions. Entities must comply with this regulation, which is guided by Ministerial Decision 100 for the year 2020. The UAE Ministry of Finance issued a Relevant Activities Guide in August 2020, assisting businesses in determining ESR applicability. Seeking guidance from experienced consultants, such as Smart Zones® UAE, is recommended.
Companies engaged in relevant activities must annually notify the regulatory authority, including details about conducting relevant activities, income subject to taxation outside the UAE, and the financial year's end date. An annual report demonstrating engagement in relevant activities must be submitted to the Authority within 12 months from the end of each financial year.
Before the conclusion of a financial period, companies must evaluate relevant activities, assess income generated, hold board meetings with physically present directors in the UAE, record minutes in the UAE, determine expenses and assets related to relevant activities, ensure access to assets through agreements and records, and demonstrate control of outsourcing arrangements.
The regulations apply to companies and/or licensees engaged in "Relevant Activities," including banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding company, intellectual property, and distribution and service centre businesses.
Non-compliance may lead to fines ranging from AED 10,000 to AED 50,000, depending on the nature of the failure. Repeated failure may result in fines up to AED 30,000, and persistent non-compliance could lead to suspension, withdrawal, or non-renewal of the trade license.
Yes, certain entities are exempt from meeting the Economic Substance Test, subject to specific conditions. Exemptions are available for investment funds, licensees tax resident outside the UAE, fully owned licensees by UAE residents conducting activities solely in the UAE, and branches of foreign entities with relevant income subject to tax outside the UAE.
Smart Zones® UAE provides comprehensive support, including initial assessments, detailed evaluations, assistance in filing annual notifications, and support for Economic Substance Return filing with regulatory authorities. This ensures companies meet compliance obligations and navigate the ESR framework effectively.
Want to know more, talk to Smart Zones® Dubai advisory team they will be happy to help. Ready to invest in your future?
