The UAE Economic Substance Regulation (ESR) was enacted in 2019. The reason behind passing such regulation is to enhance transparency and prevent issues relating to tax evasion within the nation. The regulation is well aligned with international efforts to maintain high standards of economic substance and transparency. The ESR regulates businesses engaged in specified activities and imposes an obligation on them to show an adequate level of economic presence in the UAE. The article details the requirements of ESR and guides businesses on how to comply with ESR submissions regarding trade licenses issued in 2024.
What is Economic Substance Regulation (ESR)?
ESR stands for Economic Substance Regulations in the UAE. ESR requires that every company incorporated in the Mainland and Free Zones of the UAE and other forms of business shall maintain adequate “economic presence”. The main objectives of ESR are:
- To minimize harmful tax practices
- It should align with international standards and recommendations of the Organization for Economic Co-operation and Development (OECD).
Key Business Activities Covered Under ESR
All trade licenses issued in 2024 shall have ESR if their business activities fall within the specified categories of Relevant Activities. The relevant activities include:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Distribution and Service Centre Business.
Note that the ESR Regulations prescribe the criteria upon which it is decided whether a business is in fact carrying on a relevant activity or not. Businesses should, therefore, look at such criteria in order to know their compliance obligations.
If your business has a 2024 Trade License and your company falls within one of the above categories, in all probability, you will be subject to ESR. Non-compliance may lead to extremely serious penalties, ranging from financial penalties to public disclosure of the non-compliant entities and may extend to the revocation of your Trade License.
ESR Compliance Requirements
In the case of ESR, a company is expected to be in a position to demonstrate that relevant people, assets, premises, and expenditure exist in the UAE for activities relevant to the income earned. The business will simply be called upon to show a genuine economic presence, contributing to the local economy through a relevant activity.
The specific requirements to demonstrate economic substance vary based on the nature of the business and its activities. In a general sense, however, the elements of ESR compliance would include:
- CIGA: Conducting Core Income-Generating Activities (CIGA) in the UAE.
- Economic Substance Test: A Licensee shall be required to pass an Economic Substance Test for every financial period for which it generates income from a Relevant Activity. In other words, the Economic Substance Test requires that:
- The Licensee and Relevant Activity are being directed and managed in the UAE;
- The relevant Core Income Generating Activities are being conducted in the UAE; and
- The Licensee has adequate people, premises, and expenditure in the UAE.
- Qualified People: The business should have qualified people who can perform its core income-generating activities.
- Physical Presence: The Company must maintain a physical presence in the UAE. This would mean an office and other such infrastructural facilities.
- Expenditure: The business must have incurred adequate operating expenditure that is business-related in the UAE.
- Documentation: Appropriate supporting documentation showing full compliance with the ESR shall be maintained.
Steps for ESR Submission
The process of registering ESR in UAE involves the following:
- Identification of Relevant Activities: Identify whether the business you engage in holds any of the said “Relevant Activities” as mentioned above.
- ESR Notification Filing: File a notification form each year with your Regulatory Authority. The ESR notification is required to be submitted in the UAE within six months of the end of your financial year. It is still to be filed even if you did not generate income from a Relevant Activity.
- Economic Substance Test: In the case the business has generated income from a Relevant Activity, such a person shall be required to meet the Economic Substance Test. Simply put, as regards such activities, one needs to demonstrate an adequate level of economic presence in the UAE.
- Economic Substance Report Preparation: Gather information and documentation required for the preparation of the Economic Substance Report, including detailed descriptions of activities of the business, its income, expenses, and the assets used in UAE.
- File Economic Substance Report: An ESR company shall submit an Economic Substance Report to the Regulatory Authority after the end of the financial year within 12 months.
- Compliance and Penalties: Ensure adherence to the ESR Regulations and circumvent penalties including fines and administrative sanctions such as suspension or withdrawal of trade licenses.
- Exemption: Licensees and Exempted Licensees carrying on a Relevant Activity (whether or not the Licensee or exempt Licensee has earned income from the Relevant Activity for the financial period) are required to file a Notification within six months from the end of the relevant financial period. The notification shall be filed through the Ministry of Finance’s filing portal.
ESR Compliance Deadlines
Considering the licenses issued in the year 2024, the ESR notification must be filed within six months from the end of the financial year, and the ESR report shall be submitted within 12 months from the end of the financial year. Any non-compliance may result in penalties and affect the renewal procedure for the respective license.
Penalties for Non-Compliance
The table below indicates the penalties related to Economic Substance Regulations as mentioned in Cabinet Resolution No. 57 of 2020 concerning Economic Substance Requirements.
| Article No. | Violation | Penalty Amount |
| 13 | Failure of a Licensee or an Exempted Licensee to file the Notification and any relevant information or documentation within six months from the end of the financial year | AED 20,000 |
| 14(1) | Licensee or Exempted Licensee commits any of the following offenses:a. It fails to file the Economic Substance Report and any information or documentation otherwise required; or b. It fails to meet the Economic Substance Test for each financial year. | AED 50,000 |
| 15(1) | Providing incorrect information to the Regulatory Authority or the National Assessor Authority, knowing the same to be incorrect, and failing to bring it to their notice on becoming aware of the error will attract a penalty. | AED 50,000 |
Points to Consider for Smooth ESR Submission
- Regulation Knowledge: The companies should know what ESR is all about and under what guidelines they need to file the ESR report.
- Record Keeping: The books of accounts of CIGA, employees, the assets under insurance management, and activities of the management shall be maintained.
- Internal Audit: Internal audits shall be periodically conducted to make sure that all ESR compliance aspects are taken care of.
- Consultation from ESR Consultants: Consultation from ESR consultants shall provide much-needed professional advice and shall be useful in the submission of information at the appropriate time as per the prescribed deadlines.
How an Economic Substance Regulations Consultant Can Help
ESR compliance is quite complicated and time-consuming on its own. The benefits of engaging an ESR consultant include the following:
- Expert Guidance: The ESR consultant has a comprehensive understanding of all the ESR requirements, and proper guidance relevant to your business activity will be provided.
- Accurate Reporting: Consultants in ESR prepare and submit proper notifications and reports under ESR, avoiding the imposition of penalties.
- Compliance Management: The Consultant shall perform periodic reviews and audits for continued compliance.
- Time Efficiency: By outsourcing ESR compliance, the business will be involved in core activities while all the regulatory requirements will be met.
Conclusion
Any business with a trade license issued in the year 2024 from the UAE shall mandatorily have to adhere to ESR. Knowledge about the requirements, proper preparation of the reports, and timely submission are of prime importance in avoiding penalties. An Economic Substance Regulations consultant may make the compliance process much easier for your business to flow smoothly within this regulatory framework.
Consider hiring professional support from an ESR consultant in this regard. Only an independent professional will then be able to extend further specialized guidance regarding proper reporting that will provide for ongoing compliance, making you carefree about growing your business. Seek our team of ESR consultants to help make your business comply seamlessly with the requirements.
Read More: What is the Penalty for ESR Notification?
