Following the assessment of UAE’s tax framework by the European Union Code of Conduct Group on the vertice of Business Taxation, the UAE government took a monumental step. Underpinned by its commitment as an active member of the Organisation for Economic Cooperation and Development (OECD), the UAE introduced Economic Substantial Regulations on 30th April, 2019. The purpose of launching the ESR was to ensure that UAE entities undertaking one or more ‘Relevant Activities’ notifies actual profits that are equivalent to the activity undertaken in the UAE.
As per these regulations, an entity that conducts any sort of activity listed in the ‘Relevant Activities’ column and also earns income out of the same is required to submit a notification form to their respective authority within six months from the end of the notified period, i.e., the financial year. With reliable auditing and accounting services s, concerned entities can submit this notification through the Ministry of Finance’s online ESR portal. To make this process easier, it is advisable to take guidance from accounting and auditing service providers in the country.
Understanding Economic Substance Regulations (ESR)
While it’s clear that the ESR has mandated all firms in the UAE conducting Relevant Activities to file notifications and returns on the MoF portal, irrespective of their registration in the UAE or jurisdiction of incorporation, there can be confusion over the notified period. To make this process simpler, let’s say your firm’s financial year ends on 31st December 2023, your due date for submitting the ESR annual notification will be considered 30th June 2024.
As the deadline for submitting the Economic Substance Regulation (ESR) Annual notification for the financial year ending 31st December 2023 looms around the corner, businesses during this particular hour find themselves at a critical juncture. In this scenario, ensuring compliance with the prescribed regulations is not merely a legal obligation but an important move to maintain the integrity of operations taking place within the country.
ESR is a set of regulations directed at maintaining economic substance by requiring UAE onshore and free zone companies to carry out certain ‘defined’ business activities that help establish a considerable economic presence in the UAE. This also plays a part in making sure that companies aren’t subjected to any tax evasion mechanisms.
An Economic Substance Report must be filed by a corporate entity (e.g. Limited Liability Company, Public Joint Stock Company, Private Joint Stock Company, etc.) or a partnership (Limited Liability Partnership, General Partnership etc.) that is not an Exempted Licensee and that derives Relevant Income from any of the following Relevant Activities during a Reportable Period:
- Banking Businesses
- Insurance Businesses
- Investment Fund Management Businesses
- Lease-Finance Businesses
- Headquartered Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Distribution and Service Centre Businesses
ESR Filing Deadline as per the Financial Year
| Financial Year | Ending Dec 2023 | Ending March 2024 |
|---|---|---|
| Notification Due Date | 30 June 2024 | 30 Sep 2024 |
| Report Filing Due Date | 31 December 2024 | 31 March 2025 |
Exempt Licences
Certain entities conducting Relevant Activities are exempt from the requirement to maintain adequate economic substance in the UAE. Subject to meeting certain conditions, this exemption is available to:
- All entities that are tax resident outside the UAE.
- Investment Funds
- Entities that are completely owned by UAE residents, which means they should not be part of a multinational group and carry out business activities only in the UAE.
- A foreign company’s branch whose relevant income is subjected to corporate tax in some jurisdiction other than the UAE.
An entity making an exemption claim is only required to file a notification along with the relevant documents for substantiating the claim. Where the exemption claim is denied, such an entity will be required to meet the ES Tests and file a report.
Penalties under the Economic Substance Regulations
| Type of Offence | Amount of Penalty |
|---|---|
| Failure to submit the ESR Notification | AED 20,000 |
| Failure to submit the ESR Report | AED 50,000 |
| Failure to provide accurate or complete information | AED 50,000 |
| When an entity fails to meet the Economic Substance Test | 1st year – AED 50,000 – Information exchange with foreign competent authorities 2nd consecutive year – AED 400,000 – Information exchange with foreign competent authorities – Suspension, cancellation or non- renewal of trade license |
A&A Associates: Your ESR Compliance Partner
A&A Associates, the top corporate tax consultants in Dubai is well-versed in the intricacy of ESR regulations. They offer expert auditing and accounting services and are familiar with the challenges businesses face in meeting compliance requirements. By making us your trusted partner, you get access to expert assistance which helps in navigating the complexities of ESR compliance, and ensuring that your business remains in adherence with the regulations.