Economic Substance Regulation (ESR)
The UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No 31 of 2019) on 30 April 2019 as part of its commitment as a member of the OECD Inclusive Framework. These regulations have been introduced in response to an assessment of the UAE’s tax Framework by the European Union code of conduct Group on Business Taxation. These regulations have categorised and listed certain business activities as “Relevant Activities” and has made it a mandate that all the businesses which fall under “Relevant Activities”, whether offshore or free zone companies, must maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake.
The activities have been categorised as “ Relevant Activities.”
- Banking Business
- Intellectual Property Business
- Holding Company Business
- Insurance Business
- Distribution and Service Center Business
- Shipping Business
- Investment Fund Management Business
- Lease Finance Business
- Headquarter Business
The purpose of ESR is to ensure that the UAE entities undertake sufficient economic activity which can commensurate with the actual profits reported in the UAE.
Our team of experts help the companies to comply with the ESR standards and provide effective solutions to adhere to the regulation. For more details feel free to contact us.
FAQ
Can a Single Economic Substance Report be filled for Multiple Entities/Licenses?
NO, Each licensee has to file a separate Economic Substance report irrespective of the fact that they are part of a consolidated group for financial reporting/VAT reporting.
What is the objective behind ESR Report filing?
ESR has been introduced to address the concerns regarding entities which has been issued a license in UAE but have very little economic substance to justify the profits reported in UAE. This is a regulatory check as a part of the UAE’s commitment to the OECD framework and AML practices.
Is there any deadline for filing the ESR?
Companies and establishments involved in “relevant activities” in the UAR are required to submit ESR notifications and reports annually to the regulating authority. A maximum period of6 months is granted from the end of the fiscal year for the notification, and a maximum period of 12 months is given from the end of the fiscal year for the reporting.
What are the penalties in case of failing to submit the notification?
| Scenario | Fine in case of ESR Notification (AED) | Fine in the case of ESR Reporting (AED) |
| Due date missed | 20,000 | 50,000 |
| Incorrect information provided | 50,000 | 50,000 |
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