UAE Economic Substance Regulations –  Notification and Reporting 

In line with Cabinet Decision No. 57 of 2020, the United Arab Emirates (UAE) has implemented the Economic Substance Regulations (ESR). These regulations apply to domestic enterprises, free zone entities, and those engaged in specific activities outlined by the authorities. As of January 1, 2019, UAE entities, including offshore companies and branches of both domestic and foreign entities, are required to demonstrate economic substance within the UAE.

What is Economic Substance Regulations (ESR)?

The Economic Substance Regulations (ESR) is a set of rules introduced by the United Arab Emirates (UAE) in 2019. ESR aims to make sure that companies in the UAE are more than just empty shells, but have real activities and a strong presence in the country. The regulations were created to make the UAE follow global tax standards, especially the Base Erosion and Profit Shifting (BEPS) plan by the Organisation for Economic Co-operation and Development (OECD).

The deadline for ESR notification and report filing for 2024 affects many different types of businesses registered in the UAE, including those in free zones and offshore areas. These businesses include banking, insurance, investment fund management, shipping, and intellectual property, among others. If your business fits into these categories, it’s crucial to be aware of the ESR notification and reporting requirements in the UAE – the deadline is approaching. Companies or individuals who do not follow these rules could lead to penalties, ranging from financial fines to even the suspension of your business license.

UAE Economic Substance Regulations Relevant Activities

List of Activities with respect to the ESR Notification and Report Filing Deadline for 2024

  • Banking Business: Financial institutions must demonstrate substantial activities like lending and capital risk management. 
  • Insurance Business: Insurance companies need to show underwriting and risk management activities. 
  • Investment Fund Management Business: Firms must prove actual decision-making related to the fund’s assets. 
  • Shipping Business: Companies should have logistical, shipping, and operational activities in the UAE. 
  • Lease-Finance Business: Businesses must show leasing activities or financial services related to leasing. 
  • Headquarters Business: Companies need to prove that they hold key management decisions and have substantive activities in the UAE. 
  • Holding Companies Business: Holding companies must show that they manage substantial assets or investments. 
  • Distribution and Service Centre Business: Businesses should demonstrate that they either store and distribute goods or manage services for related entities. 
  • Intellectual Property Business (“IP”): Companies must prove actual R&D activities or hold substantial intellectual property rights. 

Each of these activities has its own set of compliance requirements, which become increasingly important as the ESR notification and report filing deadline approaches. Failure to meet these requirements could result in severe penalties.

Deadlines for ESR Notification and Reporting Compliance 

The deadline for filing depends on each company’s financial year end. Note that all companies engaged in relevant activities must file an ESR notification, regardless of income generation. However, companies earning income from these activities must also submit an ESR Report alongside the notification by their respective deadlines.

ESR Notification: Within 6 Months from the End of the Reportable Period

If your business is involved in any of the listed activities, you need to notify the Ministry of Finance (MoF) within six months after your financial year ends. You can file the notification online through the MoF’s ESR portal. When you file, you’ll need to say which activities you did, if you earned money from them, and if you paid tax on that money outside the UAE. However, if your company has many branches in the UAE, you just need to submit one report for all of them together.

ESR Report: Within 12 Months from the End of the Reporting Period

Entities must submit a report on the Ministry of Finance’s online ESR portal within twelve months after the end of the relevant financial year (FY). This report includes a thorough document that explains your business activities, earnings, expenses, and other important information. These report requirements play a vital role in ensuring compliance with the ESR and maintaining transparency within the UAE business landscape.

The deadline for this quarter are on the following table:

Financial Period EndDeadline
31st December, 2023ESR Notification to be filed by 30th June, 2024
30th June, 2023ESR Report to be filed by 30th June, 2024

Economic Substance Tests (ES Tests)

These three (3) tests must be satisfied for UAE entities earning income from Relevant Activities:

  1. Core Income Generating Activity (CIGA): You must show that the main activities that generate income happen in the UAE.
  2. Directed and Managed: You should demonstrate that your business is being directed and managed within the UAE. This includes having regular board meetings and keeping records of those meetings.
  3. Adequacy: You need to prove that you have enough employees, spending, and physical assets in the UAE.

Holding companies face simplified ES Tests, while High-risk Intellectual Property businesses undergo more rigorous testing.

Steps to File ESR in UAE 

As the ESR notification and report filing deadline 2024 approaches. This section aims to guide you through the steps to ensure compliance, focusing on ESR notification and reporting in UAE. 

  1. First, Identify Relevant Activities: Figure out if your business falls under any of the activities outlined by the ESR. This step is vital to meet the notification and reporting deadline.
  2. Next, Appoint an ESR Compliance Officer: You can choose someone in your team or enlist the help of experts to oversee your ESR compliance. They’ll guide you through the process and make sure you meet the UAE’s notification and reporting deadlines. 
  3. Third, Collect Necessary Information: Gather all the required documents, including financial statements, business reports, and employee details. 
  4. Then, File Notification: Your ESR compliance officer will submit your notification through the Ministry of Finance’s online portal. To meet the deadline, make sure this is done within six months from the end of the reporting period.
  5. Confirmation and Record-Keeping: Once you’ve submitted the notification, keep records of the confirmation and any communication with the authorities.  
  6. File Report: If your company earns income from relevant activities, you must also file a report through the Ministry of Finance’s online portal within 12 months from the end of the reporting period.
  7. And lastly, Confirmation and Record-Keeping: After submitting the report, maintain records of the confirmation and any correspondence with authorities. This documentation remains essential for ESR compliance in the UAE.

Penalties for ESR Filing Noncompliance

In the UAE, there are strict penalties for missing deadlines related to Economic Substance Regulations (ESR) notifications and reports. Here’s a breakdown of these penalties:

  • AED 20,000 fine for failing to submit the required notification along with necessary information or documents.
  • 2. AED 50,000: For neglecting to submit the Economic Substance Report and all required information or documents. Also, if you don’t meet the Economic Substance Test for each financial year.
  • 3. AED 50,000: For providing incorrect information to the Regulatory Authority or the National Assessing Authority. As well as, providing false information from the Economic Substance Regulations.
  • 4. AED 400,000: For repeated violation of the regulations in the following financial year.

These penalties highlight the importance of meeting ESR deadlines and providing accurate information to the authorities.

ESR Compliance in UAE  with Adam Global 

Adam Global has been at the forefront of providing top-tier Economic Substance Services. We offer comprehensive assistance with ESR filing and compliance, Accounting & Auditing, IP Consulting, PRO services, and all matters related to business setup and company formation, ensuring that you meet all regulatory requirements seamlessly.

Key Takeaways

In understanding the Economic Substance Regulations (ESR) in the UAE, it’s crucial to take a “substance over form” approach. This means looking beyond just appearances to see if a company is truly engaged in any of the Relevant Activities outlined by the law. Each UAE entity is evaluated individually to see if it meets the requirements. Importantly, there’s no minimum income threshold for these assessments.

The UAE Economic Substance Regulations (ESR) aim to prevent companies, especially big multinational ones, from unfairly moving their profits to countries with low or no taxes, where they don’t do much business.

So, the ESR requires all companies involved in business activities that can be easily moved between different places to give a detailed report to the authorities each year. This report shows that they really do have proper operations and activities happening in the UAE. Failure to comply can result in severe penalties, including financial fines and business suspension. 

The deadline to file Economic Substance (ES) Notification is approaching fast — it’s set for June 30, 2024, for businesses with a financial year ending on December 31, 2023. We highly recommend conducting an ES Assessment before this deadline hits to steer clear of potential penalties.

About the Author

Mrs. Dilkush Jamil, Client Relationship Manager at Adam Global. With expertise in compliance and ESR filing in Dubai and the UAE, Dilkush offers invaluable insights and guidance. Backed by Adam Global’s professional services, she helps businesses achieve long-term success.

Contact us at +971 56 501 4164 for personalized consultation about ESR today!

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