DIFC Freezone Economic Substance Regulations

To meet the international criteria of BEPS (Base Erosion and Profit Shifting), UAE introduced economic substance regulations.

Economic substance regulations are not limited to particular areas; rather they are covering all offshore firms, companies licensed with free zones, and the mainland. Thus, no matter in which area you are running your business, you must have to come in line with economic substance regulations. 

There are more than 2500 companies that are registered under DIFC free zone along with 25600 employees. All entities will pass through the process of evaluation to confirm that they are executing relevant activities. 

Corporations operating in DIFC-free zones need to follow the given requirements as per ESR regulations. 

  • The first step is submitting an ESR notification with Dubai international financial centre (DIFC) to make sure that activities performed by businesses are relevant.
  • Secondly, DIFC companies have to attempt ESR tests in case when they are proceeding with some sort of substantial economic activity. 
  • Filing an annual ESR report with DIFC is also a mandatory requirement for licensees in the DIFC.

The Procedure for Filing Annual Notifications for DIFC ESR

You don’t need to worry in this regard because DIFC has officially published the entire process for filing ESR notifications. All you need to do is go to the official site of MOF, observe templates for ESR reporting and notification and design your notification accordingly. Finally, submit it electronically at the MOF site at any time before the end of the reportable period which is six months. Your ESR notification should contain detailed information about whether you earn income from relevant activities or not. Also, you have to mention the financial year end and your stance about exemption if there is any. 

Also, all entities operating in DIFC that are carrying out relevant activities including exempted licensees will have to submit an ESR notification. Similarly, all entities that are going to be liquefied or dissolved in the future will also file ESR notification unless the procedure of their liquidation is completed. 

Licensees in DIFC that are Exempted from Submitting ESR Notification

The ESR in DIFC has several exemptions, just like any other law. The licensees listed below are excluded from submitting a notification: 

  1. Any licensee who executes outside the UAE and pays taxes there. 
  2. A company owned by a UAE or DIFC resident that is exclusively operating in the UAE and is not a part of any sort of global group.
  3. Any branch of an overseas union that is required to report all of its income and pay taxes there is relevant.
  4. Any investment reserve, as well as the SPVs or investment holding corporations that support it.

You should have enough proof as per economic substance regulations to claim these exemptions. You can also pertain to Ministerial Decision no. 100 for detailed knowledge.

Requirements for ESR Test in DIFC

You should have ascertained the following three conditions for clarifying the Economic Substance Test;

  • You are required to have sufficient workers, physical properties, and enough expenses in the United Arabs Emirates.
  • All core workouts for generating income should be conducted in the UAE.
  • The entire process of overseeing and supervising an entity must occur in the UAE.  

Read more: Frequently Asked Questions about ESR in UAE

Sanctions for Failing to Submit ESR Notification

When you flop in submitting an ESR notification, your firm will be exposed to a penalty in the range of ten thousand dirhams (10,000 AED) to fifty thousand dirhams (50,000 AED). Similarly, if you provide incomplete and inaccurate information, you will pay a fine of fifty thousand dirhams as mentioned in Article 66 of DIFC governing regulations for not showing data. 

ESR Reporting for DIFC Corporations

DIFC registrar of firms asks for an economic substance report from every company that is executing relevant activities. Entities running in the DIFC-free zone will have to file ESR reports at the end of the financial year within twelve months.

You have to add all details regarding assets, expenditures, revenues, and other economic substance activities in the economics substance report. Furthermore, the report should also contain information about the clearance of the ESR test. Not submitting the ESR report will also attract huge penalties which is extremely bad for the business’s reputation.

Choose our ESR Consultants

As we have discussed different aspects of ESR regulations for entities operating in DIFC. If you have any plan to set your business there or already have established a business, you should have firm knowledge about ESR compliance. Otherwise, violation of ESR will result in penalties and even sometimes liquidation of your company. Complying with ESR is compulsory yet difficult. You can choose an outsourcing firm to help you comply with ESR requirements such as notification, report, etc. Economic Substance Regulations is one top-notch firm that can help you in this regard with the best of services.