ADGM Economic Substance Regulations

The European Union Code of Conduct Group on Business Taxation evaluated the UAE’s tax system and recommended changes, which led to the introduction of the Economic Substance Regulations (“ESR”) as part of the UAE’s obligation as a member of the OECD Inclusive Framework.

In the UAE, including in Free Zones and Financial Free Zones, ESR correlates to legitimate individuals and unincorporated coalitions enrolled by a qualified authority and engaging in fitting workouts as defined by ES Regulations. Thus we use the term Licensees for these entities. 

Relevant Activities where ESR applies to Abu Dhabi Global Market 

ESR pertains to Abu Dhabi Global Market Licensees who engage in related activities listed below:

  1. Financial services industry
  2. Banking industry
  3. Insurance industry 
  4. Industries responsible for managing investment funds 
  5. Lease-finance industry 
  6. Headquarter industry
  7. Shipping industry 
  8. Holding industry
  9. Intellectual estate industry 
  10. Distribution and service centre industry.

What are the Requirements for Economic Substance in ADGM

If an ADGM Licensee engages in certain Relevant Activities and earns income from those Relevant Activities, ESR compels that they pass the ESR Test as per laws. The UAE pertains to Economic Substance Regulations (ESR) to regional corporations located in the country, involving industries in the free zones and those engrossed in any of the defined ‘relevant activities. Let’s give a view of the core requirements that are important to pursue.

  • Reportable Time Frame

The accounting citation duration, or monetary year, regarding which ES Notification is required to be catalogued is known as an ADGM Licensee’s Reportable Period. If any financial affidavits are established, they should be accomplished at the verdict of the Reportable Period.

  • ESR Filing Portal for submission of notifications and reports

ESR Reports and Notifications must be electronically filed through the Finance Portal’s Ministry, which may lay the first stone here. Besides, the Registration Authority will not ratify ESR Notifications or ESR Reports and you can face serious legal troubles. 

  • Annual filing of ESR notification

Every year, within 6 months of the verdict of the Reportable Period, ADGM Licensees and Exempt Licensees that engage in “Relevant Activities” are expected to catalogue a Notification. Failing to file the notification or submitting it after the due date will attract the attention of the FTA and relevant penalties. 

  • Report on Economic Substance ADGM 

Within a year after the end of the entity’s fiscal year, licensees that do fall under the umbrella of exempt under ESR and who engage in a Relevant Activity from where these entities derive revenue are obliged to convene the ESR test and deliver an ESR report. Failing to submit the report or submitting it after the due date will attract the attention of the FTA and relevant penalties.

What are the requirements for ADGM Exempt Licensee? 

ADGM Licensees who engage in a Relevant Activity but assert that they are exempt from executing so during the Reportable duration must still defer a Notification on the portal of MOF along with the essential supporting documentation as outlined in the Finance’s Ministry Notification Guidance. The ensuing ADGM Licensees are free from having to file or defer an ESR Report and illustrate ES in UAE for Reportable Period. 

Organizations that meet the following criteria and are fully possessed by UAE citizens or UAE residents:

  1. The entity only conducts business in the UAE and is not a member of a Group of MNE.
  2. Commodities that fall under the definition of investment reserves under the laws.
  3. Commodities that are branches of exotic corporations, with all Relevant Income of the UAE department being accountable to tax in the jurisdiction of the foreign industry. 
  4. ESR also frees businesses that are Special Purpose Vehicles or a firm of Investment Holding relevant to Investment Funding as interpreted in the Economic Substance Regulations.
  5. Firms that are tax residents in an authority besides the United Arabs Emirates.  

Deadlines for Filing Economic Substance Regulations 

According to the Economic Substance Regulations, Economic Substance Reports must be catalogued within twelve (12) months of the verdict of the relevant reportable duration, and ES notifications must be submitted within six (6) months of the verdict of the related reportable duration.

Read more: Ways of Filing ESR Notifications and Report

Do ADGM Foundations Fall Under the Scope of ESR?

Yes, every business that performs a relevant activity in the ADGM falls under the definition of ESR. Likewise, if ADGM foundations execute these activities, they will also have to comply with the ESR regulations in the ADGM, UAE.

Choose the Best ESR Consultants

ESR regulation is a complex topic and most businesses lack adequate knowledge of ESR. This leads to the unconscious making of errors and non-compliance. To avoid such circumstances, you can get complete guidance about ESR with the help of our experts. Also, our qualified staff can assist you in filing notifications and reports in time. Complete your ESR requirements on time with our services to remain in compliance and grow your business in the UAE.