ESR Guide: Factors to Consider

The purpose of these ESR regulations is to ensure that entities carrying out relevant activities in UAE own adequate economic substance within the jurisdiction. The economic substance regulations, therefore, impose certain requirements on entities engaged in relevant activities, in terms of their substance and operations in the UAE. The regulations apply to a range of activities, including banking, insurance, shipping, headquarters business, holding company business, intellectual property business, and any other activity that is considered relevant by the UAE ESR regulations. To comply with the regulations, entities must ensure that they have adequate staff and physical premises in UAE and that a significant proportion of their income is derived from activities in UAE and some other factors. 

The economic substance regulations are fueling business development in the UAE and will help to ensure that the jurisdiction remains an attractive place for businesses to operate. Here we will discuss a few key factors to consider regarding the economic substance regulations. 

  • Understand ESR compliance

ESR compliance is a set of requirements that must be met to ensure that a company is operating ethically and responsibly. Every company, regardless of size or function, needs to go through an ESR test for this purpose. This requirement is mandated by the federal tax authority. It ensures that different types of businesses operating in the UAE (authorized companies, financial services companies, etc.) are engaged in suitable activities and are properly generating income at all times.

ESR is a UAE legislation that declares that every relevant corporation or entity (licensee) must sustain adequate actions for their role in the market. For example, if an independent realtor earned no money from any of their sales over a given period, they would be deemed non-verified, meaning that they may lose their license to work as an independent realtor, and would have to appear at a hearing with the UAE government to explain why their sales were zero over their past few months and see what steps to take moving forward since the only reason for them to still have a license at all is so long as they can keep doing transactions effectively with other UAE companies.

  • An Exempted Licensee As Per ESR Compliance

By definition, an exempted licensee is a person who is licensed by the UAE government to carry on a business in the UAE and is not subject to any tax in the UAE. There are certain exempted entities from these ordinances, which entail tax resident licensees in jurisdictions outside of the UAE, investment reserves, and entities owned by UAE residents that only run business in the UAE. Additionally, any other licensee as specified by the Ministry of Finance may also be exempt from ESR compliance.

  • Influence of ESR Compliances on Businesses

The rule of ESR compliance expects the onshore and offshore firms in UAE and a few other business forms that bring on related actions to maintain and ascertain sufficient economic manifestation in the UAE. The aim is to ensure that these entities make a significant and sustained contribution to the UAE economy. The compliance regime is designed to level the playing field between onshore and offshore companies and to encourage long-term investment in the UAE.

  • Submission of ESR Notification

Those firms that come under the definition of ESR regulations have to provide the ESR notification form to the respective regulatory authority. These regulations apply over financial years that initiate from 1st January 2019. Filing a notification is something that businesses must consider in order to comply with ESR effectively.

  • Submission of ESR Report

Another important factor to consider is that these entities have to submit a comprehensive ESR report to regulatory authorities within 12 months before the end of their monetary year. 

  • Imposing Penalties 

If an entity fails to follow Economic Substance Regulations or misses out on the requirements of notification and report, etc, certain penalties will be imposed including a suspension, revocation, etc, depending upon the decision of the assessing authority.

  • Reduction of Illegal Business Practices 

The ESR will help to monitor and track businesses by reducing illegal business practices, as well as help to ensure that they are complying with all the necessary regulations. This will ultimately help to create a level playing field for all businesses and ensure that only the rightful and best businesses can thrive.

Read more: ESR Notification – Post submission Problems and Solution

Choose the ESR Services Providers

Numerous business owners find ESR processes difficult to grasp, and as a result, they make mistakes while notification reporting or filing. As previously explained, this results in severe punishments. Contact Economic Substance Regulations. to assist you with all of these processes in order to prevent your company from making costly blunders. Our skilled professionals would never make you lose at any level of ESR in the UAE.