UAE’s economic substance regulations (ESR) are applicable on many companies in Dubai and other emirates. Fulfillment of ESR guidelines can help these companies to maintain their economic existence in the United Arab Emirates. Eligible businesses in the UAE must pass the ESR test for Environmental, Social, and Governance standards in 2024.
ESR requires these companies to earn revenue from their core income-generating activities (CIGAs). While running business in the UAE, they must keep sufficient workers and space, and have financial strength to meet expenses. So, businesses must focus on maintaining adequate substance in their financial operations in the UAE to remain on track.
Both eligible licensees and businesses with exemption have to take the ESR test. Success in the ESR test signifies the financial sincerity of the UAE companies and their avoidance of unfair tax practices. Federal Tax Authority (FTA) as National Assessing Authority imposes penalties if they fail the ESR test, and are found non-compliant.
Effect of ESR standards on international businesses in UAE
What are effects of ESR standards on international businesses in the UAE?
Here are key points that summarize the influence of UAE’s economic substance regulations (ESR) on international businesses in the country.
- Alignment with international ESR guidelines
- Evaluation of corporate structure
- Making operational adjustments
- Improving business transparency
- Ensuring financial compliance
Now, we take a brief look on these pointers that highlight the significance of UAE’s economic substance regulations for business.
Alignment with international ESR guidelines
The UAE’s adoption of Economic Substance Regulations aligns it with international ESR standards, preventing tax avoidance, and profit shifting. It signifies the United Arab Emirates as a country that is financially responsible and tax compliant business jurisdiction. Especially, Dubai is a favorite global business hub for foreign direct investment, as UAE ensures ethical and transparent economic practices.
Evaluation of corporate structure
Businesses in the UAE have to strategically evaluate their corporate structures to meet economic substance requirements. Likewise, they must reassess the necessity and viability of certain corporate entities, business activities, or operational functions. This realignment ensures compliance with regulations, optimizes operational efficiency, and optimizes business strategies within the evolving financial regulatory framework.
Making operational adjustments
International businesses in the UAE are undergoing operational adjustments to comply with economic substance requirements. For example, increasing employees, expanding physical presence, and growing operational activities within the UAE, etc. This transformation demonstrate their commitment to contributing to the local economy and meeting economic substance regulations.
Improving business transparency
UAE’s ESR standards promote transparency in business operations by mandating in-depth disclosures about activities, financial performance, and core income-generating functions. This financial transparency helps stakeholders, regulatory bodies, and the public understand a company’s economic contributions and business operations. By maintaining the financial accountability, the UAE companies can foster trust among both Emirati and international customers.
Ensuring financial compliance
To maintain operational continuity in the UAE, companies must conduct proper financial compliance of their business operations. Otherwise, non-compliance with economic substance regulations poses significant risks to international businesses. For instance, monetary penalties, operational sanctions, and license suspension or withdrawal, etc.
Relevant Activities to adhere ESR standards in the UAE
Which relevant activities have to follow ESR standards in the UAE?
United Arab Emirates requires the companies performing these relevant activities to follow economic substance regulations (ESR).
- Banking operations
- Insurance services
- Investment Funds management
- Lease Finance business
- Headquarters operations
- Shipping facilities
- Holding Company activities
- Intellectual Property business
- Distribution and Service centres
Significance of ESR Notification for UAE companies
What entities need to file an ESR notification?
All entities that perform Relevant Activities (regardless they’ve reporting exemption) have to file an ESR Notification on the MOF Portal. They need to file the ESR Notification before completion of the 6 months, after the end of their financial year. Entities under liquidation or dissolution, must file ESR Notification for Reporting Periods before the completion of the liquidation/dissolution process.
Value of ESR Reporting for UAE companies
Which entities need to file an ESR report?
ESR Reporting is filing of financial information and other details for entities that conduct Relevant Activities (RA) in the UAE. Entities (not Exempt Licensees) and earning money from the relevant activities in reporting period have to file ESR report. They must submit the ESR report within 12 months after the end of the financial year.
Exempt Entities from ESR Report in the UAE
What entities are exempt from ESR report filing in UAE?
The following licensee entities have exemption from filing ESR report in the UAE, but have to issue ESR notification.
- Entities with 100% ownership by Emirati nationals or UAE resident expatriates, which only operate in the UAE, and are not member of a multinational enterprise group (MNG)
- Licensees that are tax resident in a business jurisdiction other than the UAE
- Entities that are wholly Investment Funds
- Branches of foreign companies where their income is subject to corporate tax in the jurisdiction of the parent companies
- Entities that are special purpose vehicles (SPV), or are investment holding companies of Investment Funds
Deadlines for filing ESR Notification and Reporting
When are deadlines to file ESR Notification and Reporting?
The deadline for eligible entities to file an ESR Notification is before 6 months, after the end of the financial year (FY). Similarly, the timeline for entities to file an ESR report is before 12 months, after the end of the financial year. ESR standards of UAE mandate businesses to timely inform regulatory authorities about their execution of relevant activities.
These are the upcoming ESR notification and ESR Reporting deadlines.
| Financial Year End | ESR Notification Deadline | ESR Reporting Deadline |
|---|---|---|
| 30 June 2023 | 31 December 2023 | 30 June 2024 |
| 30 September 2023 | 31 March 2024 | 30 September 2024 |
| 31 December 2023 | 30 June 2024 | 31 December 2024 |
| 31 March 2024 | 30 September 2024 | 31 March 2025 |
| 30 June 2024 | 31 December 2024 | 30 June 2025 |
| 30 September 2024 | 31 March 2025 | 30 September 2025 |
| 31 December 2024 | 30 June 2025 | 31 December 2025 |
| 31 March 2025 | 30 September 2025 | 31 March 2026 |
| 30 June 2025 | 31 December 2025 | 30 June 2026 |
| 30 September 2025 | 31 March 2026 | 30 September 2026 |
| 31 December 2025 | 30 June 2026 | 31 December 2026 |
Importance of Economic Substance Test
Why is Economic Substance Test important for UAE businesses?
ESR standards require UAE entities carrying out Relevant Activities and making money from them to pass Economic Substance Test. Moreover, they must conduct qualitative and quantitative assessments to show that their activities fall within the ESR guidelines. UAE businesses must meet the Economic Substance Test to ensure regulatory compliance while signaling their financial strength.
Economic Substance Test under the ESR guidelines need UAE businesses to demonstrate the following.
- Entity is being managed and its Relevant Activity is being run in the UAE
- It is conducting the Core Income Generating Activities (CIGAs) within the UAE
- Entity has enough staff, appropriate premises, and adequate finances in the UAE
Consequences of non-compliance with UAE’s ESR guidelines
UAE companies who are non-compliant with ESR standards are subject to these applicable consequences.
- Fine on failure to file an ESR notification
- Penalty on non submission of an ESR Report
- Fine on failing to pass the Economic Substance Test
- Penalty for submission of false ESR information
Next, we briefly look upon these consequences of non-compliance with ESR guidelines of the UAE.
Fine on failure to file an ESR notification
What is the penalty on failing to file an ESR notification?
Licensees (or Exempted Licensees) who fail to file an ESR notification face an administrative fine of up to AED 20,000. This is in lieu of the Article 13 of the UAE’s Cabinet Resolution No. 57 of 2020. National Assessing Authority (aka FTA) informs the entity of the penalty after establishing the commission of the infringement.
Penalty on non submission of an ESR Report
How much is the fine on failure to file an ESR Report?
Failure to submit an ESR Report, and any relevant information or documentation results in a penalty of AED 50,000. According to Article 14 Article 14 of Cabinet Resolution No. 57 of 2020, the fine increases to AED 400,000 in subsequent year. The penalty for recurring year(s) of failure is subject to a six-year limitation period. National Assessing Authority may also apply any administrative action like suspension, revoking, or non renewal of the entity’s trade/commercial license.
Fine on failing to pass the Economic Substance Test
What is the penalty on failure to pass the Economic Substance Test?
Entities which fail to pass the Economic Substance Test in the first year get a fine of AED 50,000. This is in accordance with Article 14 Article 14 of Cabinet Resolution No. 57 of 2020. The penalty for recurrent failure in Economic Substance Test in the subsequent year results in the fine of AED 400,000.
Penalty for submission of false ESR information
How much is the fine on submitting wrong ESR information?
Entities which submit incorrect information during ESR reporting and don’t rectify the errors face a fine of AED 50,000. National Assessing Authority notifies the imposition of penalty once the violation comes to its knowledge. So, both Licensees and Exempted Licensees must keep diligence in presenting precise information and paperwork to the ESR regulatory authority.
Definition of Economic Substance Regulations (ESR) in UAE
What are Economic Substance Regulations (ESR) in the UAE?
Economic Substance Regulations (ESR) standards are the government guidelines that mandate companies to demonstrate genuine financial activities in the UAE. ESR guidelines require onshore and offshore companies in the United Arab Emirates to have a substantial economic presence. This tax compliance indicates they are conducting real business activities, rather than merely doing tax avoidance.
Conclusion
Following the UAE’s Economic Substance Regulations (ESR) is the need of the hour for entities performing relevant activities. However, non-compliance with ESR standards leads to severe monetary repercussions. Furthermore, this negligence can result in harsh administrative sanctions from the National Assessing Authority (FTA).
It is crucial to seek guidance from professional consultancy firms to overcome this challenge. You can get comprehensive assistance to file ESR notification and report on time. Delegating this task to them allows you to focus on your core business operations.
To avoid ESR penalties in Dubai and across the UAE, contact KWS Middle East now. Also, they help you in managing all necessary compliance documentation on your behalf. From business setup to regulatory reporting, KWS ME is your one-stop solution, so connect to get set go.
FAQs about Economic Substance Regulations
These are the answers to some frequently asked questions about UAE’s economic substance regulations (ESR).
Enforcement of ESR in the UAE
When were Economic Substance Regulations (ESR) implemented?
UAE’s Cabinet of Ministers Resolution 31 of 2019 brought Economic Substance Regulations (ESR) into action on 30 April 2019. Ministerial decision No. 215 of 2019 shed further guidance about ESR on 11 September 2019. Cabinet of Ministers Resolution No. (57) of 2020 made amendments in the legislation on 10 August 2020 after consulting with the OECD and the EU. Modified Guidance was set out on 10 August 2020 with Ministerial Decision No. 100 of 2020, containing an updated Relevant Activities Guide at Schedule 1.
Defining the ESR Audit
What is an ESR audit?
An ESR audit is a structured process that is initiated by the National Assessing Authority. Normally, the entity in question receives an email notification from the FTA about the assessment. ESR audit involves a thorough review of financial records, operational activities, and corporate structure.
Online submission of ESR notification and report
Where do you submit ESR notification and report?
You have to file the ESR notification and economic substance report on the portal of UAE’s Ministry of Finance (MoF).
Compliance requirements of entities under ESR
What are compliance requirements of an entity performing Relevant Activities under ESR?
An entity executing Relevant Activities must demonstrate financial strength by passing economic substance test. Licensees and exempt licensees must file Notifications within 6 months of the end of Reportable Period on the MOF Portal. Entity generating income from Relevant Activity must file annual ESR report within 12 months after the financial year end.
Filing a single Notification and Report for multiple Entities
Can you file a single Notification and Report for multiple Entities?
UAE entity with branches in the UAE can submit a single ESR Notification and Report. This way it can combine the reporting for the relevant activities of itself and its UAE branches. However, other entities must file stand-alone ESR Notifications and Reports for accounting purposes. This is regardless of whether they are part of a consolidated group.
Past ESR Notification and Reporting Timelines
What were the previous ESR notification and Reporting timelines?
Here are the past ESR notification and Reporting timelines for your reference.
| FY End | ESR Notification Timeline | ESR Reporting Timeline |
|---|---|---|
| 31 December 2019 | 31 January 2021 | 31 January 2021 |
| 31 March 2020 | 31 January 2021 | 31 March 2021 |
| 30 June 2020 | 31 January 2021 | 30 June 2021 |
| 30 September 2020 | 31 March 2021 | 30 September 2021 |
| 31 December 2020 | 30 June 2021 | 31 December 2021 |
| 31 March 2021 | 30 September 2021 | 31 March 2022 |
| 30 June 2021 | 31 December 2021 | 30 June 2022 |
| 30 September 2021 | 31 March 2022 | 30 September 2022 |
| 31 December 2021 | 30 June 2022 | 31 December 2022 |
| 31 March 2022 | 30 September 2022 | 31 March 2023 |
| 30 June 2022 | 31 December 2022 | 30 June 2023 |
| 30 September 2022 | 31 March 2023 | 30 September 2023 |
| 31 December 2022 | 30 June 2023 | 31 December 2023 |
| 31 March 2023 | 30 September 2023 | 31 March 2024 |
