UAE Economic Substance Regulations (ESR) and ESR Filing in UAE
In the UAE, Economic Substance Regulations (ESR) have been put in place to align with international standards. This move is part of the UAE’s commitment to the Organization for Economic Co-operation and Development (OECD) Framework and in response to an evaluation of the UAE’s tax framework by the European Union (EU).
What UAE-Based Businesses Must Do
According to the regulations, UAE-based businesses engaged in Relevant Activities must notify the regulatory authorities and submit an annual UAE Economic Substance Report. This report confirms that they are indeed conducting these relevant activities and provides details on their economic substance in the UAE.
By adhering to these regulations, the UAE ensures its commitment to international tax standards and transparency, contributing to its position as a global business hub.
Consequences of Non-Compliance with ESR Regulations
Failure to comply would result in following administrative penalties:
Failure or delay to file ESR Notification | AED 20,000 |
Providing Inaccurate information | AED 50,000 |
Failure or delay to submit ESR Report | AED 50,000 |
If submitted report does not meet the requirements of Economic Substance Regulations in the UAE | AED 50,000 |
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If the failure continues for a second consecutive year, the penalty amount is increased to AED 400,000 in the subsequent year. Additionally, regulatory authorities may impose other penalties, including suspension, revocation, or non-renewal of a Licensee’s license. Compliance with ESR regulations is crucial to avoid these penalties and ensure the smooth operation of your business in the UAE.
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Deadlines under UAE Economic Substance Regulations (ESR)
Relevant Business Activities Covered Under ESR
- Banking Business
- Shipping Business
- Insurance Business
- Headquarters Business
- Holding Company Business
- Lease – Finance Business
- Investment Fund Management Business
- Intellectual Property Business
- Distribution and Service Centre Business
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Who is exempt under the UAE Economic Substance Regulations (ESR)?
- If the entity is categorized as an investment fund, it qualifies for exemption.
- An entity that is a tax resident in a jurisdiction outside the UAE can also claim exemption under ESR.
- If the entity is wholly owned by one or more UAE residents and meets specific criteria, it can be exempt. This criteria includes not being part of a multinational group and exclusively conducting business activities within the UAE.
- A branch of a foreign entity whose relevant income is subject to tax in a jurisdiction other than the UAE is also eligible for exemption.
Requirements to meet the Economic Substance Test in the UAE
Frequently Asked Questions
Is it necessary to file Economic Substance Notification and Economic Substance Report every year?
Yes, a Licensee must file an Economic Substance Notification and an Economic Substance Report every year as long as the business continues the relevant activity.
Who needs to submit a Notification and by when?
Licensees undertaking any type of Relevant Activity, irrespective of income earned from it during the financial period, as well as Exempted Licensees, are required to file a Notification. This should be done within six months from the end of the relevant financial period. All Notifications must be submitted on the Ministry of Finance filing portal.
Are there any cases where a business is only required to submit a Notification and not file an Economic Substance Report?
Yes, a Licensee that is Exempted or does not earn any income from its Relevant Activity is not required to file an Economic Substance Report. The web portal for Economic Substance Filing automatically assesses your need to file such a report based on your Notification, and will only generate a Report if you are obligated to submit one.
What is the minimum income threshold to fall under the Economic Substance Regulations?
There is no minimum income threshold for complying with the Economic Substance Regulations. If an entity engages in a Relevant Activity, it is obligated to submit the ESR Notification. This holds true even if the entity doesn’t earn any income from that activity; a notification must still be filed.
What if a Licensee does not undertake a Relevant Activity during a financial period?
The Licensee would not be required to notify its Regulatory Authority nor submit an Economic Substance return for the relevant financial period.
What if a Licensee undertakes a Relevant Activity, but does not earn any income from that activity during a financial period?
The Licensee would still need to submit a notification to its Regulatory Authority. However, they are not required to file an Economic Substance return for that relevant financial period.
Do the regulations only apply to UAE entities that are part of a foreign multinational group?
No. The regulations impose Economic Substance requirements on any UAE entity which carries on a Relevant Activity, regardless of whether the UAE entity belongs to a foreign multinational group. However, a UAE based Distribution Business, Service Centre Business, Headquarter Business or High-Risk IP Business would only be within the scope of the regulations if the UAE entity transacts with foreign group companies.
Is a company registered under an 'offshore' free zone company regime subject to the regulations?
Yes. Regulation shall apply to ‘offshore’ company provided it undertakes a Relevant Activity.
Do the activities listed on the commercial license determine whether a Licensee undertakes a Relevant Activity?
No. Whilst the commercial license may indeed describe the Relevant Activity, a ‘substance over form’ approach must be used to determine whether a Licensee undertakes a Relevant Activity and is within the scope of the regulations.
If all income from the Relevant Activity is earned from outside UAE, is the Licensee exempt from the Regulations?
No, this Licensee is not exempt from the regulations. Income from a Relevant Activity for which the Licensee needs to demonstrate Economic Substance in the UAE includes all income, including income that is generated by the Licensee outside of the UAE.
Will Economic Substance be assessed on a Licensee-by-Licensee basis, or can Licensees that are part of the same group elect to be assessed on a 'consolidated' basis?
No. The regulations do not allow Licensees that are part of the same group to be aggregated for Economic Substance purposes. Each Licensee will need to comply with the regulations, and demonstrate Economic Substance on an individual basis.
Do the directors of the Licensee need to be resident in the UAE?
No. Directors only need to be physically present in the UAE to attend relevant board meetings of the Licensee.