ESR Registration & Compliance
The Economic Substance Regulations (ESR) in the United Arab Emirates (UAE) were introduced to align with global standards set by the Organization for Economic Co-operation and Development (OECD) and address concerns related to harmful tax practices and base erosion. The regulations came into effect from April 30, 2019. The ESR requires some UAE companies to demonstrate sufficient economic substance in the country. The objective is to ensure that businesses operating in the UAE have a real presence and conduct substantial operations that justify the profits earned within the country.
The purpose of ESR registration in the UAE is to ensure compliance with international standards set by the Organization for Economic Co-operation and Development (OECD) regarding economic substance in certain business activities.
The UAE, like many jurisdictions, introduced the ESR to address concerns about base erosion and profit shifting (BEPS) and to demonstrate its commitment to global tax transparency and cooperation. The ESR framework mandates some UAE businesses to participate in particular activities in order to achieve specific economic material criteria.
Companies subject to ESR must register with the proper regulatory authorities and give detailed information about their activities, income, costs, and assets. Companies, partnerships, branches, and other sorts of commercial entities that perform specialized tasks are examples of these entities.
The main goal of ESR registration is to ensure that firms engaging in relevant activities have a significant presence in the UAE and carry out their major income-generating operations locally. It aims to prevent the random movement of earnings to low-tax jurisdictions with no economic significance. The UAE seeks to increase transparency and adhere to international norms by implementing the ESR, as well as to ensure that enterprises operating under its authority have a legitimate economic presence, perform significant activities, and generate profits that match to their declared earnings. Failure to comply with ESR standards may result in sanctions and other legal consequences. Specific specifics and regulations related to ESR may change over time, therefore it is always necessary to review the most recent guidelines and seek professional help when dealing with ESR compliance in the UAE.
Important Factors about economic substance regulations in the UAE include:
- All UAE onshore and free zone businesses, including branches and subsidiaries engaging in defined “related activities,” were subject to the ESR.
- Banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding company business, intellectual property, and distribution and service center businesses were among the activities targeted by the new regulations.
- Businesses involved in connected operations must pass the economic substance test. This test takes into account elements including the type of activity, the quantity and nature of revenue generated by the venture, the number of personnel and their qualifications, the level of spending, and physical presence in the UAE.
- Entities are obliged to submit an annual economic substance statement (ESN) to the relevant regulatory authorities, detailing their activities, financial information, and materiality compliance.
- Companies that generate revenue from connected activities and fulfil the economic substance criteria are required to file an Economic Substance Statement (ESR) within 12 months of the end of their financial year.
- If a company fails the economic substance test or fails to give correct and timely information in the report, it may face additional enforcement measures such as penalties, licence suspension, or revocation. To guarantee compliance, UAE regulatory agencies have the authority to conduct investigations and inquiries.
ESR Compliance
Businesses operating in the UAE that are involved in one or more relevant operations must make a statement on the Ministry of Finance’s (MoF) online ESR portal within six months of the fiscal year (FY). Companies are obliged to provide information in this file on the pertinent activities they carried out, any income they produced from them, and whether or not that income is liable to taxation outside of the United Arab Emirates. When a company from the UAE has many UAE branches, just one consolidated declaration has to be submitted.
Economic Substance Tests (ESTs)
UAE entities that earned income from any associated activities must establish adequate substance in the UAE by meeting the three economic substance tests (EST) listed below.
Core Income Generating Activity (CIGA) test is required for principal activities to be performed in the UAE
Directed and managed trials where the business is operated and managed from the UAE in regards to related activities
Adequate testing requires sufficient resources in the UAE.
Holding companies are subject to reduced ES tests, whereas high-risk intellectual property businesses are subject to an enhanced ES test.
ESR Reporting
An ESR statement must be filed by any company that has earned income from related activities within twelve months of the end of the related fund. Companies must disclose various details as part of this filing, including:
Economic Substance Filing Portal in UAE
- It’s an appropriate activity type.
- The amount and type of associated capital received by it.
- The amount and type of operational expenditures and assets related to the essential activity carried out by it.
- Location of its place of business, as well as any relevant plants, properties, or equipment employed in the relevant activity.
- The number of full-time employees with qualifications and the number of employees in charge of performing the amount of duty
- The principal source of revenue for the relevant activity and its financial accounts.
- A statement regarding whether or not it meets the economic content requirements.
- Notification of whether or not the relevant action is a high-risk IP licensee
ESR Exemption
Certain businesses performing related activities are exempt from the UAE’s requirement that they maintain a minimum level of economic substance. This exemption is applicable in the following situations:
- Investment funds.
- Businesses owned by residents of the UAE that are independent of international corporations and only operate in the UAE
- companies with tax residency outside of the UAE.
- Branches of foreign companies.
An entity claiming exemption just has to submit a declaration and the necessary supporting documentation. If the exemption application is denied, the business in question has to clear the ES test and submit a report.
ESR (Economic Substance Regulation) registration and compliance services are provided by MSZ Corporate Service Provider to businesses in Dubai, UAE. We guide you through the entire process, from understanding the ESR requirements to ensuring full compliance with the regulations. You can reach us at +971562181007 or info@msz.ae for seamless ESR registration and compliance services in the UAE.