Who is Exempted from ESR in UAE?

The UAE Economic Substance Regulation (ESR) was introduced for corporations to comply with the Organization for OECD (Economic Cooperation and Development) framework to evade harmful tax practices. The regulation ensures companies operating in the UAE have a substantial economic presence and to notify and report. Therefore, corporations are advised to seek the expert services of ESR consultants in UAE to implement best practices seamlessly and to stay compliant to which noncompliance accrues hefty fines.  

Who are Exempted Licensees Under ESR?

A Licensee refers to an entity that is either a juridical person incorporated inside or outside the State or an Unincorporated Partnership registered in the State, including a Free Zone and a Financial Free Zone that carries on a Relevant Activity. The UAE Economic Substance Regulation exempts a number of licensees as listed below

1. Natural persons

Persons who conduct business activities in the UAE without forming or establishing a legal entity are exempted under the Economic Substance Regulation.

 2. Investment funds

Investment funds, such as Real Estate Investment Trusts (REITs), Venture Capital Funds, and Isolated Equity Funds, are exempted from ESR regulation if they meet the standards set out by the UAE Ministry of Finance.

3. Government entities

Any entity exclusively owned by the UAE government or any of its States is exempted from the purpose of ESR. 

 4. An entity wholly owned by UAE residents

 An entity that is fully and beneficially owned, directly or indirectly, by UAE residents may be exempted from the Economic Substance Test provided that the entity meets the following conditions:

  •  The entity is not part of a multinational enterprise (MNE) Group.
  •  All of the entity’s activities are carried out exclusively within the UAE.
  •  The UAE resident owners of the entity are physically present in the UAE.

It should be noted that the entity must not be engaged in any business activity outside of the UAE. In this context, “UAE residents” refers to individuals who are either UAE citizens or hold a valid UAE residency permit and currently reside in the UAE.

5. International organizations

International organizations that are recognized under an accord or agreement between the UAE and another country, and involved in non-profit activities are exempted from ESR.

In addition to the categories of exempted persons mentioned above, there is also a category of “others” which can qualify for exemptions under certain conditions. These entities include;

  • Branches of Foreign Companies
  • Sole Proprietors
  • Partnerships

The eligibility standards for this category may vary depending on the nature of the activities and the position status of such entities.

Therefore, it is advisable for businesses falling under the “others” category to seek expert guidance from top ESR consultants to determine their eligibility for exemption and to stay compliant. However, if your company falls under one of the exempted categories, you would still need to submit a notice (or notification) to the relevant regulatory authority to establish the exemption.

Read more: Ways of Filing ESR Notifications and Reports

Criteria for Determining Exempted Activities

To establish whether a business is eligible for ESR exemption, the following criteria should be laid;

  • The nature of the business activity
  • Whether the business has any workers, physical assets, or locations (presence) in the UAE 
  • Whether the business is owned by a UAE occupant or a foreign entity
  • Determination of whether the business has a tax presence in a Foreign Jurisdiction.  

What are the Compliance Requirements for Exempted Licensees?

Exempted persons for ESR are compelled to enforce ESR requirements to stay compliant and to avert penalties. This includes the following:

  • Exempted persons are obligated to keep suitable records: to establish their compliance with the Economic Substance Regulations.
  • Records must be kept for at least 6 years: the record should include information such as financial statements, employee data, and details of business activities.
  • Exempted persons must also inform the relevant authorities of their exempt status and provide any essential documentation to support their claim.

Seek the expert services in UAE

Understanding the classifications of exempted licensees under ESR is important for businesses operating in the UAE. By fulfilling the ESR regulations and meeting the standards for exemption, businesses can avoid penalties and maintain their presence. At Economic Substance Regulations., we are dedicated to supporting businesses with their ESR compliance needs. Thus, contact us today and we shall be glad to assist you!