Economic Substance Regulations (ESR) Compliance
The Economic Substance Regulations (ESR) is a government initiative in the UAE aligned with its international commitments to bodies like the Organization for Economic Co-operation and Development (OECD). ESR mandates that UAE entities, including offshore companies and branches of local and foreign companies engaged in specific activities, maintain sufficient economic substance in the UAE.
The primary aim of these regulations is to ensure accurate reporting of entity profits, preventing businesses from artificially relocating profits to jurisdictions with lower or no income tax, thereby exploiting tax laws.
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Key Stats
Applicability & Frequency
It applies to entities that conduct relevant activities and generate income from these activities and are not exempt specifically are required to file the notification and report with the Ministry of Finance. ESR compliance requirements are to be fulfilled every year and they apply to companies, partnerships, and other business forms (Licensee) registered in the UAE, including a free zone and financial free zone that are engaged in any of the following relevant activity.
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Headquarters Business
- Intellectual Property Business
- Holding Company Business
- Distribution & Service Center Business
If applicable, entities should file a notification on the Ministry of Finance’s ESR portal within six months of the end of their financial year. The filing must include the disclosure of the relevant activities conducted, income statement, and the declaration whether the income was subject to tax outside of the UAE. A single consolidated notification can be submitted if the entity has multiple branches in the UAE.
Penalties
Failure to file notification: AED 20,000
Failure to file the report: AED 50,000, Deemed failure to meet ES Tests
Failure to provide accurate or complete information: AED 50,000, Deemed failure to meet ES Tests
Failure to meet ES tests: 1st year – AED 50,000 – Information exchange with foreign competent authorities
2nd year – AED 400,000, Information exchange with foreign competent authorities, Suspension, cancellation or non-renewal of trade license
F&F is your reliable partner for ESR filing services and ESR notification filing services. With proven expertise in understanding and following local, national, and international compliance regulations and nullifies the possibilities of legal risk to your organisation
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