In 2019 as per the Cabinet of Ministers Resolution no. 31, the United Arab Emirates introduced the Economic Substance Regulations after the OECD (Organization for Economic Cooperation & Development) in order to reinforce the tax framework of the country. The Ministers Resolution no. 57 presented an enhanced version of the ESR regulations in the year 2020 that follows the standards of EU COCG (European Union Code of Conduct Group) and OECD. These regulations aim to make some financial free zone, free zone, and onshore business companies to ensure satisfactory economic presence in the UAE along with executing relevant activities actively.
General Economic Substance Requirements
The Economic Substance Regulations apply some requirements on the businesses that fall under its scope and come within the definition of a licensee or exempted licensee. Every licensee in the UAE that performs a relevant activity needs to comply with the ESR regulations and requirements. If a licensee executes more than one relevant activity in the UAE then it has to demonstrate the economic substance of every relevant activity independent of the others. Also, it does not matter whether or not a relevant activity is mentioned on the licensee’s trade license, demonstration is mandatory as long as an activity is being executed in the UAE, this is called substance over form approach.
The requirements of ESR regulations can be divided into the following three vitally important categories;
Economic Substance Notification
- An ESR notification is a prerequisite to ESR report submission.
- Every licensee and the exempted licensee is supposed to file a notification exactly six months before the year-end date of the reportable period.
- In case of non-submission of ESR notification, a penalty of 20,000 AED can be imposed on the licensee or exempted licensee.
- A notification requires some vital information about the business and its current status.
- The status of a licensee or exempted licensee is also required to be mentioned in the notification form.
Economic Substance Report
- An ESR report is the second requirement of ESR regulations which is due 12 months before the year-end date of the reportable period.
- Only the licensees are supposed to report to their regulatory authorities.
- In case of the non-submission of this report, a penalty of 50,000 AED can be imposed on the licensee.
- The report requires requisite information about the business, its income, management, employees, etc.
Economic Substance Test
- It is mandatory for every licensee to meet the ESR test for every reportable period.
- After the submission of notification and report by the licensee, it is up to the regulatory authority to decide whether the business meets the ESR test or not.
- The authority evaluates all the information given by the business before declaring its decision.
- In case of failing the ESR test, a penalty of 50,000 AED can be imposed on the licensee. However, failing to provide the required information in the ESR report can also lead to failing the ESR test and facing the same penalty.
Relevant Activities & Relevant Regulatory Authorities
Economic substance guidance in the UAE has explained, under Ministerial Resolution no. 57 and Ministerial Resolution no. 100, that there are a total of nine relevant activities that fall under the scope of ESR and each of these relevant activities is regulated by a relevant regulatory authority. These regulatory authorities that are different for various relevant activities are the places where the required notifications, reports, etc are submitted. Following is a list of regulatory authorities that regulate pertinent different activities;
- The securities and commodities authority regulates the economic substance for an intellectual property business.
- The ministry of economy regulates the economic substance for shipping business.
- The ministry of economy also regulates the economic substance for a headquarters business.
- The securities and commodities authority also regulates the economic substance for an investment fund management business.
- The central bank regulates the economic substance for the banking business.
- The ministry of economy also regulates the economic substance for a distribution and service center business.
- The ministry of economy also regulates the economic substance for holding company business.
- The central bank UAE also regulates the economic substance for lease/finance business.
- The insurance authority regulates the economic substance for an insurance business.
- The free zone authority regulates the economic substance for any above business that is being executed in a free zone.
- The financial free zone authority regulates the economic substance for any above business that is being executed in a financial free zone.
Choose the Best Services
If you face any difficulties in understanding ESR, ask our Economic Substance Regulations experts for complete guidance. Choose our best and most qualified service providers to help you throughout the procedures of notification filing and reporting. Our services are error-free and we let you focus on the growth and development of your business without worrying about compliance with ESR regulations. Contact us now.
Syed Hassan Ali carries with him an experience of 13 years in providing legal guidance and consultancy. He is a holder of two degrees, one in Business Management and the other in Economics for Engineers and Scientists. He carries an in-depth knowledge of the UAE market and continues to be an asset to businesses, providing clarity regarding applicability of the ESR regulations as well as guide them in making informed decisions.