As countries move away from Oil and look for greener alternatives, the United Arab Emirates along with other major oil exporters had to diversify their business portfolios. While some countries have invested outside, the UAE has looked inward and has slowly transformed itself into a major business hub of the world.
But when so many companies are investing in the UAE and so many businesses popping up left and right. UAE needs to keep a record of them all, especially considering that it does not levy Taxes on most businesses. UAE’s solution to this is the Economic Substance Regulations or ESR.
If you are a business operating in the UAE, you need to know about ESR Regulations and in this guide, we will tell you all about them.
What are Economic Substance Regulations (ESR)?
The Economic Substance Regulations are a set of rules and regulations employed by the UAE government to ensure that businesses in the UAE have a genuine economic presence and are operating as per the economic regulations of the country.
ESR regulations were first introduced in 2019, following the concerns raised by the European Union regarding harmful tax practices. Essentially this means that there are no shell companies operating in the UAE, that do not have a significant economic presence in the country and simply have a UAE address for Tax purposes.
What are Relevant Activities?
ESR Regulations apply to all the businesses or legal entities operating onshore in UAE and in its Freezones and are engaged in the following relevant Activities.
- Businesses involving Banking.
- Businesses involving Insurance.
- Businesses involving Investment Fund Management.
- Businesses that have their Headquarters in UAE.
- Holding Companies in UAE.
- Businesses with Distribution and Service Centers.
- Financial Businesses involving Lease.
- Businesses involving Shipping.
- IPs or Independent Property Businesses.
What Entities meet the Substance Test?
To determine if a business falls under Economic Substance Regulations, it has to pass the substance test which means it has to meet the following criteria.
- Core Income-Generating Activities (CIGA): This essentially means that companies operating in the UAE generate substantial income through their core activities based on the relevant entities.
- Managed from the UAE: This means that the companies are headquartered in the UAE and the business is being managed and directed from the UAE. They are out to have board meetings in UAE with board members who are experts in their respective fields.
- Adequate Number of Employees: The company should have an adequate number of employees who are skilled and qualified in their jobs and are physically present in the country.
- Adequate Resources for business: The company should have adequate resources to meet its business needs and the needs of its employees.
What are the Licensees?
Licensees are companies or businesses that are registered in the UAE, they take part in the relevant activities and meet the substance test and hence ESR regulations apply to them. Here are a few examples of a licensee.
- Any LLC or a Limited Liability Company.
- Any Public or Private Share Holding Company.
- Any Joint Venture.
- Any Partnership that involves any of the above-mentioned aspects.
Sole Individuals or proprietors, as well as Trusts and foundations, are not considered licensees and, hence do not fall under these regulations.
What licensees are Exempt from ESR?
The following licensees are exempt from the Economic Substance Report.
- Any licensee who is a tax resident outside the UAE.
- Any UAE-owned business that operates solely in the UAE and is not part of any international or multinational group.
- Branches of international entities that are present in the UAE but the entity itself does not fall under UAE tax jurisdiction.
- Investment funds and their underlying SPVs.
What do you need to Report?
All the licensees need to report the following information when filing an ESR Regulation report.
- All CIGA-related information.
- Relevant employee details (Number of full-time Employees etc.)
- Operating costs and expenses.
- Details about the revenue generated.
- Details of all relevant activities.
- Relevant company details (Proof of address, license number, etc.)
- Lease agreement details (If applicable).
- Corporate documents (Relevant to ESR).
These details are subject to change depending on the type of business you are operating. In essence, you need to report all the details that qualify you for the substance test.
When do you need to Report it?
The Financial Year of 2024 is still ongoing so its deadlines will come next year. However, the deadlines for the financial year 2023 are as follows.
| Financial Year End Date | Notification Filing Deadline | Report Filing Deadline |
| December 21, 2023 | June 30, 2024 | December 31, 2024 |
| June 30, 2023 | December 31, 2023 | June 30, 2024 |
Notification means that your company is subject to Economic Substance Regulations and Reporting means that you will submit a report and there are separate deadlines for both as mentioned above.
Penalties for not Reporting your Business
Failure to report or even notify can result in hefty penalties for companies and the penalties are as follows.
- If you fail to Notify that you fall under ESR Regulations then you are subject to AED 20,000 fine.
- If you fail to file the ESR report then you are subject to AED 50,000 fine.
How do I file the ESR Report?
The process of filling the ESR report is quite simple and as follows.
- First, you will go to the UAE Ministry of Finance (MOF) website.
- Next, you will click on Real Economic Activities (ESR) in the services section.
- You will be taken to a new page with all the details about ESR.
- On the bottom of the page, there is an option to Sign in.
- Once you click that you will be directed to a new page, where as a first-time user you will register.
- Upon registration, you can log in to this account.
- Once logged in you will see the send notification option.
- Here you will submit all the necessary information like licensee details, relevant activities, etc.
- Once you are done submitting all the necessary information, you will click on send and you are done.
The website contains detailed information for every step of the process in case you get stuck.
