The Economic Substance Regulation was implemented on 1st January 2019. Under the new law, companies must follow essential steps in compliance with the ESR standards.
- The compliance with notification
- Filing annual substance return
ESR is supervised by relevant Regulatory Authorities, and hence there are slight differences when it comes to filing the ESR returns. This includes different deadlines, documentation requirements and the related penalties for non-compliance.
How Can You file an Economic Substance Regulation Notification?
Several companies before the implementation of ESR in the UAE took advantage of the tax-free status. They moved their profit centers to UAE to avoid paying high taxes to the parent country’s government. This was a disregard for the economic benefits provided by the UAE and a form of tax evasion method used by some companies. ESR in UAE ensures that such activity doesn’t occur by allowing companies to notify them through their relevant activity. A relevant activity is where companies perform the activities mentioned in their trade license and have a standard business setup in the UAE.
ESR Notification Filing
By the Economic Substance Regulations, ESR filing UAE requires the Licensees and Exempted Licensees to file a Notification to their respective Regulatory Authorities for the relevant Financial Year in which the business carries the relevant Core Income Generating Activity. For ESR Notification Filing they are required to submit:
- The nature of respective Core Income Generating Activity being carried out by the Licensee or Exempted Licensee.
- The gross income of the Businesses is carried out under Core Income Generating Activity.
- The end date of the financial year of the Relevant Activity.
- The supporting documents provide additional evidence as required by the Regulatory Authorities.
Exempted Licensees are also compelled to file the ESR Notification and along with that, submit supporting documents in order to qualify their exemption.
Read also : Economic Substance Reporting & Guidance in UAE
Exempted Licensees who are tax residents in a jurisdiction outside the United Arab Emirates should submit the following documents:
- Businesses that are tax residents outside the UAE are required to issue a letter or a certificate that affirms their taxability in the foreign jurisdiction.
- An assessment of business tax, a business tax demand, proof of payment of the business tax, or any additional supporting document, issued by the business that is located in a foreign jurisdiction in which the business claims to be a tax tenant.
However, when a business is unable to provide adequate evidence in order to verify its exemption position, the Regulatory Authorities change the status of the business and repute them as a Licensee.
The time period for the submission of notification is different from that of an Economic Substance Report. The Ministry of Finance Portal is used for ESR Notification Filing which is done within the period of six months from the end of the relevant Financial Year. Also, the Licensees who have submitted an ESR Notification directly to their respective Regulatory Authorities should re-submit a Notification electronically on the Ministry of Finance Portal once available.
Read also : Economic Substance Regulations Notification Form
ESR Reporting UAE
Businesses are required to meet the requirements of the Economic Substance Test and file the ESR Report which entails the submission of information and documentation mentioned in the Economic Substance Regulations within the period of the relevant Financial Year. In accordance with the Ministerial Decision 57 of the year 2020, ESR Reporting should be done within twelve months from the end of the respective Financial Year.
After ESR Reporting, the National Assessing Authority issues its decision showing whether the Licensee has met the Economic Substance Test requirements within six years of the end of the relevant Financial Year.
For ESR Reporting UAE, companies that undertake the Relevant Activities are required to report;
- A relevant activity carried out by a business in the United Arab Emirates.
- Gross income of the business that is subjected to tax outside the United Arab Emirates.
- The date of the relevant financial year of the Licensee.
ESR Reporting UAE is to be submitted by the companies to the respective Regulatory Authority each respective financial year to show that they are carrying out the Relevant Activity. Under Economic Substance Regulations, it is compulsory to submit the details of the Relevant Activity, revenue, expenditures, and resources that show whether the Economic Substance Test of UAE is met.
What is the Deadline for Filing ESR Notifications and Reports?
If the company undertakes any one or more of the activities mentioned above during the financial year, it is crucial for the company to be ESR Compliant by:
- Filing ESR Notification in less than 6 months from the end of the financial year.
- Conduct an ESR test and provide the report to the concerned authority in less than or within 12 months or 1 year from the end of the financial year.
The below due dates are for ESR filing and reporting for the Company having financial year:
| FINANCIAL YEAR ENDING ON | DUE DATE FOR NOTIFICATION | RETURN DUE DATE |
| 31st Dec 2024 | 30th Jun 2025 | 31st Dec 2022 |
| 30th Jun 2024 | 31st Dec 2024 | 30th Jun 2022 |
What Are the ESR Penalties for Non-Compliance of Notifications & Report Filing?
- An administrative ESR penalty of AED 20,000 will be imposed on a licensee or exempted licensee who fails to submit a notification (and any relevant documentation or information) subject to the provisions under Article 13 of Decision 57.
- In case the licensee or exempted licensee forgets to submit the Economic Substances Regulations Report and any documentation or information and fails to meet the Economic Substance Test for each financial year, an administrative penalty of AED 50,000 shall be imposed.
- If the licensee or exempted licensee commits the same violation in the same financial year immediately following the financial year in which the violation was carried out, he shall be charged or obliged to incur an ESR Penalty of AED 400,000.
If the licensee or exempted licensee provides the regulatory authority or National assessing authority inaccurate data and is aware at the time of the inaccuracy but fails to communicate this with the regulatory authority or National Assessing authority at the time when such inaccuracy was discovered, then a penalty of AED 50,000 shall be charged.
Why Select an ESR Expert to Conduct Your ESR Reporting?
Businesses must ensure that the ESR notification and reporting are done before the deadline. Since ESR is a relatively new concept in the UAE, many companies still find it challenging to identify their core income-generating activities. Additionally, being unaware of penalties on various levels is an extra cost that can be avoided. Using an experienced accounting service from qualified Chartered accountants in the UAE gives you an extra edge in financial reporting.
Our expert ESR consultants provide end-to-end services for ESR Reporting. Also, they will give remedial measures and guidance for the economic substance regulation assessment, so the relevant activity is categorized as per your license. They also hold relevant experience and expertise in helping your business identify the relevant ESR activities and file for notification without an error in submission deadlines and reporting.
Bola Olaoye is a Legal Senior Associate and holds an LLB from Adekunle Ajasin University as well as a Bar Certificate from the Council of Legal Education. With experience spanning 14 years, she knows the ins and outs of UAE’s laws and practices and has helped provide clear and concise guidance to clients on the appropriate law-abiding measures to be taken concerning Economic Substance Regulations (ESR).
