The Economic Substance Regulations (ESR) in the UAE were introduced and came into effect on January 1, 2019.It is designed to ensure that entities engaged in certain business activities maintain substantial economic presence in the UAE. Introduced to align with global standards and combat harmful tax practices, these regulations require companies to demonstrate a genuine economic activity within the country.
Under the ESR framework, UAE-based entities involved in specific activities, such as banking, insurance, fund management, and intellectual property, must meet certain requirements. These include having adequate employees, physical assets, and operational expenditures in the UAE to support the business activity conducted. Entities must also submit an annual report to confirm their compliance with ESR provisions.
Eligibility Criteria–
To determine whether an entity is subject to ESR, it must first assess its business activities against the list of covered activities defined by the regulations. These activities typically include:
- Banking:Entities providing banking services or conducting banking business.
- Insurance: Companies engaged in insurance or reinsurance activities.
- Investment Fund Management: Entities managing funds or investment vehicles.
- Intellectual Property: Businesses holding, managing, or exploiting intellectual property assets.
- Shipping: Companies involved in operating ships and vessels.
- Headquarters: Entities providing high-level management services to affiliated companies.
- Distribution and Service Center: Entities engaged in activities like procurement and distribution of goods.
Entities must also satisfy specific criteria to demonstrate substantial economic presence in the UAE. This includes having an adequate number of qualified employees, maintaining appropriate physical assets, and incurring sufficient operating expenditures within the UAE. Additionally, entities must produce an annual economic substance report to confirm compliance.
Process to Comply with Economic Substance Regulations (ESR) in the UAE-
To comply with the Economic Substance Regulations (ESR) in the UAE, follow these essential steps:
- Assess Applicability:
- Identify Relevant Activities: Determine if your business activities fall under ESR categories such as banking, insurance, investment fund management, intellectual property, shipping, headquarters, or distribution and service centers.
- Check Tax Residency: Confirm whether your entity is considered tax-resident in the UAE, including entities in free zones, mainland companies, and foreign branches.
- Evaluate Economic Substance:
- Employee Requirements: Ensure your company has a sufficient number of qualified employees based in the UAE who are engaged in the relevant business activities.
- Physical Assets: Verify that your company maintains appropriate physical assets in the UAE related to the business activities conducted.
- Operating Expenditures: Confirm that your company incurs adequate operational expenses in the UAE that align with the business activities performed.
- Prepare and Submit Reports:
- Economic Substance Report: Compile an annual report detailing compliance with ESR, including information on employees, assets, and expenditures.
- Submission: File the report with the relevant UAE regulatory authority, such as the Ministry of Finance or the free zone authority.
- Maintain Compliance:
- Ongoing Monitoring: Regularly review and update your company’s practices to ensure continued compliance with ESR requirements.
- Seek Professional Advice: Consult with experts for guidance and support to address any compliance issues or regulatory changes.
- Respond to Inquiries:
- Authority Requests: Be prepared to provide additional information or clarification if requested by regulatory authorities regarding your ESR compliance.
Filing of Economic Substance Regulations Return-
To comply with Economic Substance Regulations (ESR) in the UAE, businesses must file their ESR return within 12 months from the end of their financial year. This return includes the submission of an ESR notification form, and, if applicable, an ESR report that details the entity’s economic activities, income, and how these activities meet the substantial activity requirements set by the regulations.
Penalties for Non-Compliance with Economic Substance Regulations (ESR) in the UAE-2nd
- Failure to Submit Notifications: AED 10,000 to AED 50,000 per failure.
- Failure to Submit Reports: AED 50,000 to AED 200,000 per failure.
- Failure to Meet ESR Requirements: AED 50,000 to AED 200,000 for significant non-compliance, with potential additional penalties for continued breaches.
These penalties can vary based on the nature and extent of the non-compliance
