Which companies are required to comply with the Economic Substance Regulations (ESR) in the UAE?

Companies that are carrying out certain types of "relevant activities" in the UAE are required to comply with the ESR. These relevant activities include banking, insurance, investment fund management, lease-finance, headquarters, shipping, and intellectual property. Companies that do not carry out any relevant activities are not required to comply with the ESR.

What happens if a company does not comply with the Economic Substance Regulations (ESR) in the UAE?

Answer: If a company does not comply with the ESR requirements in the UAE, it may face penalties, including financial penalties, suspension or revocation of its trade license, and potential criminal sanctions. Non-compliance may also result in reputational damage for the company.

Economic Substance Regulations (ESR) Compliance

Economic Substance Regulations (ESR) is the initiative by the government of UAE in accordance with its international commitment to global trade regulatory body such as the Organization for Economic Co-operation and Development (OECD). ESR imposes a requirement for UAE entities including offshore companies and branches of local and foreign companies that carry out certain activities, to maintain adequate economic substance in UAE.

The objective of this regulation is to ensure that actual profits of entities are reported properly thereby preventing businesses from artificially shifting the profits to jurisdictions with lesser or no income tax to take advantage of the tax law.

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Applicability & Frequency

It applies to entities that conduct relevant activities and generate income from these activities and are not exempt specifically are required to file the notification and report with the Ministry of Finance. ESR compliance requirements are to be fulfilled every year and they apply to companies, partnerships, and other business forms (Licensee) registered in the UAE, including a free zone and financial free zone that are engaged in any of the following relevant activity.

If applicable, entities should file a notification on the Ministry of Finance’s ESR portal within six months of the end of their financial year. The filing must include the disclosure of the relevant activities conducted, income statement, and the declaration whether the income was subject to tax outside of the UAE. A single consolidated notification can be submitted if the entity has multiple branches in the UAE.

Report

Entities should file a report on the Ministry of Finance’s ESR portal within the twelve months of the end of the relevant FY disclosing:

Economic Substance (ES) Test Status: Entities must demonstrate the presence of adequate substance in the UAE by satisfying the following Economic Substance Tests:

1. Core Income Generating Activity Test (CIGA) mandates that the core activities are to be carried out in the UAE
2. Directed & Managed Test requires that the business should be directed and managed from UAE in regard to the Relevant Activities
3. Adequacy Test mandates that the entity has adequate resources such as employees, expenses, and assets are in UAE

Details of outsourced service providers (if any)
Operating Expenditure and number of Full Time Employees
Details of CIGA conducted
Details of parent, ultimate parent, and ultimate beneficial owner

ESR compliance has multiple components that are to be met at different levels. Non-adherence to the compliance and filing attracts severe penalties.

Penalties

Failure to file notification: AED 20,000

Failure to file the report: AED 50,000, Deemed failure to meet ES Tests

Failure to provide accurate or complete information: AED 50,000, Deemed failure to meet ES Tests

Failure to meet ES tests: 1^st year – AED 50,000 – Information exchange with foreign competent authorities
2^nd year – AED 400,000, Information exchange with foreign competent authorities, Suspension, cancellation or non-renewal of trade license

BCL stays a reliable service provider in ESR regulation with proven expertise in local, national, and international compliance regulations and nullify the possibilities of legal risk to your organization!

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Economic Substance Regulations (ESR) Compliance

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