Is Your Company Subject to ESR Compliance? Guide to Check
Is your company subject to ESR compliance

Is Your Company Subject to ESR Compliance? A Simple Guide to Check and Comply

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    Economic Substance Regulations (ESR) compliance plays an instrumental role in aligning the UAE’s entities with global standards of accounting and bookkeeping. Introduced in January 2019, it is directly concerned with international tax regulations. Additionally, it is aligned with the UAE’s commitment to comply with Organization for Economic Co-operation and Development (OECD) and the European Union (EU)’s requirements. 

    Given the need for a robust regulatory framework, it is effectively imposed on the requirement of the UAE’s entities including offshore companies, and local and MNCs. It is also imposed on the companies that carry out and earn income from any related business activities to maintain economic substance in the UAE. Furthermore, it prevents harmful tax practices and ensures that businesses are generating profits from real economic activity in the country. In addition, it is followed by annual filing requirements or organizations risk penalties for non-compliance. 

    Let’s explore the key requirements under its notification and reporting compliances. 

    Relevant business activities for Economic Substance Compliance

    The UAE is recognised for its economic diversity and has become the most sought-after business destination for global entrepreneurs. Considering the need for a stringent regulatory framework, it requires entities engaged in one or more entities to be highly compliant. 

    While ES assessment is required for individual UAE entities, there is no minimum income threshold applicable on them. 

    Key obligations in ESR compliance Notification

    The UAE entities operating in one or more relevant activities are required to file a notification within six months after the ending of the financial year. They can file the notification on the online ESR portal of the Ministry of Finance’s (MoF) in which entities can disclose the relevant activities conducted and any income that was earned including the incomes that was subject to taxation outside of the UAE. 

    Economic Substance Assessment Report

    The UAE entities earning income from any relevant activity(ies) are required to submit an economic substance report. The report should also show that the entity is meeting the adequate ES requirements in the UAE, including the following in the notification filing:

    Report filing

    As part of the regulatory process, entities filing notification are also required to disclose various business details, including: 

    Benefits for introducing Economic Substance Regulations compliance

    Preventing harmful tax practices:

    Since the compliance ensures the entity has generated profits from the relevant entity, it eliminates harmful tax practices. In addition, business entities also demonstrate that they meet adequate economic substance requirements, without engaging in any unreal economic activities or business practices. 

    Avoiding Heavy Penalties:

    Any entity that does not comply with ESR can face significant penalties for operating without meeting UAE’s regulations. Penalties may include financial fines, potential suspension or revocation of business licenses. This can disrupt operations and cause damage to the business. 

    Aligning with International Standards:

    The compliance has become integral part of the UAE’s business environment. It ensures that the country’s laws are aligned with international accounting and bookkeeping standards. A sa result, it can help the country in refraining from being labeled as a non-cooperative tax jurisdiction, while contributing to attracting more foreign investments. 

    Conclusion

    ESR compliance is imperative for companies established in the UAE to safeguard their operations. Its stringent criteria helps in protecting their company’s reputation while ensuring they remain relevant in the sight of the UAE authorities and international governing bodies.


    A&A Associate, a leading business advisory firm in the UAE assist businesses with Economic Substance Regulations compliances. Our expert team of professionals takes the charge of all your activities that can affect your business’s ESR compliance including accounting and bookkeeping.

    Looking to dive deeper into the conversation, connect with us today

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