The Economic Substance Regulations require all entities carrying out relevant activities in the UAE to clarify that they have sufficient economic substance in the UAE through some mandatory procedures. These regulations refer to all onshore and offshore firms, branches of foreign companies, and other legal entities conducting relevant businesses in or from the UAE.
The ESR in UAE defines these relevant activities including banking, insurance, investment fund management, holding company business, etc. The regulations also specify the number of additional activities that may fall under relevant activities, including shipping, intellectual property, etc. The ESR regulations impose some requirements on such businesses which ultimately impact these businesses in one way or another.
Impact of ESR on Businesses
Here, we will briefly highlight the impacts of ESR regulations on businesses in the UAE;
Delivering Regular & Accurate Reports:
The UAE’s Economic Substance Regulations require businesses to ascertain that they have sufficient economic substance in the UAE to be granted tax benefits. One of the key requirements for businesses to meet is to provide regular and accurate reports on their activities in the UAE.
Failure to provide detailed ESR reports can result in businesses being subject to penalties, including fines and the loss of their tax benefits. This is why it is so crucial for businesses to guarantee that they have robust ESR reporting systems in place.
The ESR also requires businesses to disclose certain data to the authorities regularly. This includes information on the nature and amount of their income, expenses, assets, and liabilities. By submitting accurate and up-to-date reports and ESR notifications, businesses can ensure that they are in compliance with the ESR and avoid any sanctions.
Transparent Tax Information Preserves UAE Tax Residency
The UAE’s Economic Substance Regulations require businesses to demonstrate their economic substance in the UAE to secure their UAE tax residency. One of the fundamental requirements of the ESR is for businesses to cherish transparent tax information.
Transparent tax information is essential to demonstrate compliance with the ESR. It allows businesses to show that they are paying the correct amount of tax in the UAE and that they are not diverting profits to low-tax jurisdictions.
Maintaining transparent tax information can be a challenge for businesses, particularly if they are operating in multiple jurisdictions. However, it is essential to comply with the ESR and avoid penalties.
Read More: Frequently Asked Questions about ESR in UAE
Abolishment & Deregistration of Companies:
Entities conducting relevant activities must meet two core requirements. The first requirement is that an entity must have adequate staff, expenditure, and physical assets in the UAE for the activity. The second requirement is that the entity must file an annual ES return and pass the ESR test. This return contains information on the entity’s income, expenditure, and assets in the UAE. If an entity fails to meet either of these requirements, it may be subject to penalties, including fines and deregistration. This secures the labour market of the UAE by ensuring that companies employ adequate personnel and have a healthy and sustainable environment.
Before the introduction of these regulations, businesses were able to operate without having to disclose their financial information or economic substance. However, under the new regulations, businesses are required to provide detailed information about their financial status and economic substance to remain law-abiding. This has led to several businesses being forced to liquidate or deregister, as they are unable to meet the new ordinances.
A Healthy Environment For Business Competitors:
The regulations have also had a positive impact on the overall business environment in the UAE, by reducing the opportunities for malpractice and illegal businesses as these businesses are now more likely to be detected and penalized. These regulations require businesses to illustrate their economic substance in the UAE to obtain and retain their licenses. This has resulted in increased transparency and accountability in the business sector.
This is creating a healthier environment for businesses to operate in and is ultimately benefiting the UAE economy as a whole. This has also led to a more level playing field between businesses, as those who can’t meet the requirements are no longer able to operate in the UAE.
You should read:Understanding Economic Substance Regulations
What is the Purpose of ESR Reporting?
The main goal of economic substance reporting is to provide information to FTA about the Licensee and the revenue, expense, assets, workers, and management related to its relevant activities in the UAE.
What is the Main Requirement of ESR?
The ESR procures the distinct requirements for businesses to indicate that their substantial economic activity is in the UAE and it is not driven exclusively to profit from an inadequate or non-tax jurisdiction.
Why Choose Outsourcing
The impact of ESR on relevant businesses in the UAE is huge. These regulations require businesses to remain active and conscious of their obligations. Missing out on any requirement or obligations will not be tolerated at all. This increases the stress of compliance in some businesses. However, businesses have a legal way to relieve the stress of compliance and that is outsourcing. Seeking guidance and support from an outsourced firm like us will certainly let you feel easy in the process of compliance.
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.