Economic Substance Rules (ESR) in UAE:

Why Did the UAE Introduce Economic Substance Rules (ESR)?

In April 2019, the UAE introduced ESR through Cabinet of Ministers Resolution No. 31 of 2019 (Resolution 31) as part of its commitment to international tax standards. On August 10, 2020, Resolution No. 57 of 2020 (Resolution 57) replaced Resolution 31 and other previous resolutions. This was done to align with global tax standards set by the OECD and the European Union.

What is ESR UAE?

To put it simple, Economic Substance Rules (ESR) are regulations that require companies operating in the UAE to conduct significant business activities within the country. The main goal of ESR UAE is to ensure that businesses are genuinely active and not just registered in the UAE to benefit from its favourable tax environment.

What Does This Mean for Businesses in the UAE?

This means that UAE onshore and free zone companies, along with certain other business types, are required to demonstrate a sufficient “economic presence” in the UAE for their specific activities. Businesses must show that their profits align with the level of economic activity they conduct in the UAE.

The purpose of these Regulations is to ensure that UAE entities report profits that reflect their actual economic activity within the country. Resolution 57 and Ministerial Decision 100, which make up the Regulations, were developed in consultation with the Organisation for Economic Co-operation and Development (OECD) and the European Union (EU).

Which Activities are Affected?

The ESR UAE applies to businesses involved in the following activities:

• Banking Business
• Insurance Business
• Investment Fund Management
• Lease – Finance Business
• Headquarters Business
• Shipping Business
• Holding Company Business
• Intellectual Property (IP) Business
• Distribution and Service Centre Business

If your business falls into any of these categories, you must comply with ESR UAE requirements. These businesses are required to file and report for ESR UAE annually.

Please note that this list is not exhaustive. It’s important to conduct further research to determine if you need to take action.

What Requirements Must UAE Businesses Meet?

If a UAE entity earns income from a Relevant Activity, it must:

1. Demonstrate Management and Direction from the UAE:

The entity must show that its activities are “directed and managed” from the UAE. This includes holding board meetings in the UAE and having UAE-based managers or directors.

2. Maintain Adequate Resources:

The entity must have enough qualified employees, office space, and annual operating expenses in the UAE related to the activity.

If an entity engages in multiple Relevant Activities, it must meet the economic substance requirements for each activity. Different activities may have different requirements. For instance, holding companies have fewer requirements, while “high risk” intellectual property activities have more stringent ones.

What Needs to Be Reported?

Annual Notification:

Entities involved in a Relevant Activity must submit a notification within six months of their financial year-end. This notification should confirm whether they conducted a Relevant Activity and if any income from it was taxed outside the UAE. Entities claiming an exemption or that did not earn income must also submit this notification.

Annual Economic Substance Report:

Entities that earn income from a Relevant Activity must file an annual report. This report should include a self-assessment of whether they met the economic substance requirements, details about the income earned, the number and qualifications of their staff, and information about their office space and other assets used for the activity.

When Do New Entities Need to Comply?

New entities must comply with these regulations starting from the beginning of their financial year. Their first report is due 12 months after their financial year-end.

Why Is Compliance Important?

Non-compliance with ESR UAE can lead to severe penalties. Businesses that do not adhere to these rules may face fines up to AED 300,000. It is important to seek expert advice to ensure full compliance and avoid these penalties.

Record-Keeping Requirements

You must maintain detailed records to prove compliance with ESR UAE. This includes:

• Employee records
• Financial documents
• Evidence of core income-generating activities

Ensuring ESR UAE Compliance: Your Partner in Navigating UAE Regulations

At IFZA Dubai, we are committed to upholding the highest standards in combating illegal activities and reinforcing the UAE’s efforts to adhere to international regulations. We conduct thorough UBO (Ultimate Beneficial Owner) certification as part of our client onboarding process and have robust controls and reporting mechanisms in place for compliance with the UAE’s Economic Substance Regulations (ESR UAE).

Our experienced team is here to support you every step of the way, from company registration and license management to visa applications. Whether you need guidance on running your current business in Dubai, relocating it, or starting a new venture, we provide expert assistance to help you navigate the process smoothly and successfully.

For more information, you can visit the Ministry of Finance – ESR: Economic Substance Regulations and Federal Competitiveness and Statistical Authority – Relevant Activities: Relevant Activities.

This blog was created to provide a general overview. Please note that the specific requirements may vary depending on your company’s particular activities.