In recent years, the UAE has implemented Economic Substance Regulations (ESR) to ensure that businesses operating in the country are conducting genuine economic activities. These regulations are aimed at preventing harmful tax practices and ensuring that businesses have a substantial presence in the UAE.
Compliance with ESR is crucial for businesses operating in the UAE to avoid penalties and ensure transparency in their operations. Failure to comply with ESR can result in fines, suspension of licenses, or even the deregistration of the company. By understanding and adhering to ESR requirements, businesses can maintain their legal status and reputation in the UAE market.
Therefore, we will guide you to understand ESR notification and reporting requirements. We’ll break down who needs to comply, what information needs to be submitted, and the deadlines involved.
What is ESR (Economic Substance Regulations) in UAE?
UAE implemented Economic Substance Regulations (ESR) to ensure businesses operating there have real economic activity. The ESR applies to companies registered in the UAE, including those in free zones, that conduct any of the designated “relevant activities.”
ESR aims to prevent businesses from setting up shop in the UAE just to take advantage of its tax benefits without any substantial economic presence.
Who Needs to Comply with ESR?
Any business operating in the UAE that conducts any of the following “Relevant Activities” needs to comply with ESR:
- Banking
- Insurance
- Lease-Finance
- Investment Funds Management
- Headquarters Activities
- Shipping
- Holding Companies
There are also exemptions for certain types of businesses, so it’s important to check if your specific company falls under the ESR requirements.
Companies engaged in these activities are required to submit an annual Notification to the authorities, including details about their activities.
What is ESR Notification?
An ESR Notification in the UAE is the first step for businesses complying with the Economic Substance Regulations (ESR). It’s essentially an initial form submitted to the authorities informing them of your activities.
Purpose of the Notification:
Informs Authorities: The notification acts as a flag to the UAE Ministry of Finance that you exist and are potentially engaged in relevant activities.
Provides Basic Information: The notification allows you to submit preliminary details about your business operations, including the nature of your activities.
Who Needs to Submit ESR Notifications?
1. Relevant Activities
Any UAE-based business, including those in free zones, that conducts one or more of the ESR-defined Relevant Activities is required to submit a notification. (These activities include banking, insurance, shipping, etc.)
2. Regardless of Income
Even if your Relevant Activity hasn’t generated income during a financial period, you still need to submit a notification.
3. Exempt Entities
There might be exemptions for specific circumstances or license types. It’s advisable to consult the official ESR guidance or a qualified professional for confirmation if you believe your case might be exempt.
Information Required in the ESR Notification
The ESR Notification in the UAE requires you to submit some basic information about your company and its activities. Here’s a general outline:
1. Company Details:
- Company Name and Commercial Registration Number
- Legal Structure (e.g., Limited Liability Company)
- Registered Address in the UAE
- Contact Information (email and phone number)
2. Financial Year
This specifies the period covered by the notification.
3. Relevant Activities
You’ll need to identify which Relevant Activities (as defined by the ESR) your company undertakes. These can include banking, insurance, investment fund management, and others.
4. Exemption Claim (if applicable)
If your company believes it qualifies for an exemption from filing an Economic Substance Report, you can indicate that here. However, you still need to submit a Notification even if claiming exemption.
Deadlines for submitting the ESR notification
The ESR Notification needs to be submitted electronically on the Ministry of Finance (MoF) ESR portal. There’s no specific deadline mentioned, but it’s generally 6 months from financial year-end.
It is recommended to file it as soon as possible after the end of your company’s financial year. This ensures you’re compliant and avoids any potential delays.
What is ESR Reporting? What to Expect
ESR reporting and notification are two separate steps in the UAE’s ESR process. ESR is a more detailed process that involves filing a full report demonstrating your company’s economic substance in the UAE. It goes beyond simply stating your activities.
You’ll need to provide evidence that you have adequate employees, qualified personnel, physical office space, and incur expenses in the UAE to support the Relevant Activities you claim.
ESR reporting is only mandatory for companies that generate income from their Relevant Activities.
So, if your company falls under both these categories (Relevant Activity + Income), then you’ll need to file a full ESR report, along with the initial notification. Companies with no income from Relevant Activities still need to submit a Notification, but not a full report.
Economic Substance Test
This is the core concept behind ESR reporting. It essentially assesses if your company has real economic value in the UAE and isn’t just using it as a shell for tax purposes. The report should demonstrate you’re conducting genuine business activities in the UAE, not just artificially shifting profits there.
Deadline for submitting an ESR report in the UAE
The deadline for submitting an ESR report in the UAE is within 12 months from the end of your company’s financial year.
Content of the ESR Report (Demonstrating Economic Substance)
The ESR report goes beyond just listing your activities. It’s your chance to prove you have a genuine business presence in the UAE for the Relevant Activities you undertake.
Here are some potential elements the report might require:
1. Details of qualified personnel
This demonstrates you have dedicated employees in the UAE managing the Relevant Activities.
2. Physical office space
Evidence of a physical office in the UAE where the activities are conducted is crucial.
3. Operating expenditure
Demonstrating you incur expenses in the UAE related to the Relevant Activities.
4. Nature and value of your core functions
Explaining the specific activities performed in the UAE and their value creation.
5. Details of any outsourced activities
If you outsource part of the Relevant Activities, information about the service providers is needed.
Shuraa Tax Guides Your Way
Ensuring compliance with ESR regulations in the UAE is crucial for businesses to avoid penalties and maintain good standing with authorities. It is essential to stay updated on ESR notification and reporting requirements to avoid any legal issues. For complex ESR matters, it is advisable to seek professional help from experts like Shuraa Tax.
At Shuraa Tax, our team of experienced accountants, auditors, and tax advisors in Dubai are here to help. For all your ESR and broader taxation needs, Shuraa Tax is your trusted partner. Contact us today at +971508912062 or info@shuraatax.com.
