Economic substance regulations is not a novel thing anymore. Entities in UAE are aware of the regulations and most of them have already filed the notification. Some of them are still in the process of filing notification, by paying penalty since the deadline is already over.
But ESR notification filing is not the end to the process; it is just the beginning. Companies carrying out the Relevant Activity must submit an annual report within a year of the end of the fiscal year of the business. The report should include detailed information about the relevant activity. ESR reporting must be done within the time prescribed by the Regulatory Authority and should follow the form and manner as specified by the Authority.
The UAE economic substance regulations apply to all UAE onshore and free zone companies, branches, representative offices, and other business forms established or licensed in the UAE that engages in one or more of the ‘Relevant Activities’ and generate revenue from these activities.
Relevant Activities under ESR in UAE
- Banking Business
- Insurance Business
- Investment Fund management Business
- Lease – Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual property Business (“IP”)
- Distribution and Service Centre Business
The economic substance regulations reporting should contain information related to the tax residence, status of the entity, the turnover, number of employees, amount of expenditure, address, etc. The information should be supported with documentary evidence.
Requirements to meet Economic Substance Test in UAE
A Licensee meets the Economic Substance Test in relation to a Relevant Activity in the following cases:
- If the Licensee conducts State Core Income-Generating Activity in the State.
- If the Licensee is directed and managed in the State in relation to that activity, provided the Licensee’s board of directors meets in the State at an adequate frequency having regard to the amount of decision-making required at that level.
- Having regard to the level of Relevant Activity, if there is an adequate number of qualified full-time employees in relation to that activity who are physically present in the State (whether or not employed by the Licensee or by another entity and whether on temporary or long-term contracts), or adequate level of expenditure on outsourcing to third-party service providers, whose activities, employees, expenditure, and premises are in the State; and these activities, employees, expenditures, and premises are adequate for carrying out the Relevant Activity being outsourced.
- If there is adequate operating expenditure incurred by it in the State, or adequate level of expenditure on outsourcing to third-party service providers whose activities, employees, expenditure and premises are in the State; and these activities, employees, expenditures, and premises are adequate for carrying out the Relevant Activity being outsourced.
- If there are adequate physical assets in the State or adequate level of expenditure on outsourcing to third-party service providers in the State, for the activities of the Licensee;
- In the case of State Core, Income-Generating Activity carried out for the relevant Licensee by another entity, if it is able to monitor and control the carrying out of that activity by the other entity.
What are the consequences of ESR non-compliance?
Late or non-reporting, as well as failure to comply with economic substance requirements, could result in penalties, spontaneous exchange of information with foreign authorities, and potential suspension, revocation, or non-renewal of its registration.
What HLB HAMT offers?
- Consulting on Economic Substance Regulation (ESR)
- Identify the qualifying entities for Economic Substance Regulation compliance
- Identify the qualifying business segments for Economic Substance Regulation compliance
- Report and advise on overall Economic Substance Regulation readiness by the Entity
- Ongoing Economic Substance Regulation compliance
- Secretarial services in connection with Economic Substance Regulation record maintenance
- Economic Substance Regulation filing with the authorities in the proper /prescribed format
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