Note: Cabinet Decision No. (98) of 2024 introduces key amendments to the UAE Economic Substance Regulations (ESR), amending certain provisions under Decision No. (57) of 2020. These changes bring relief to UAE businesses, especially in light of the Federal UAE Corporate Tax Law, effective for financial years starting on or after 1 June 2023. However, ESR requirements remain applicable for financial years starting from 1 January 2019 through to 31 December 2022.
Economic Substance Regulations Services In Dubai
The economic substance framework applies to all companies licensed in the UAE to control tax evasion, whether they are natural or legal persons. This law is in force in almost 11 countries worldwide.
The economic substance regulations were already introduced in the UAE in April 2019 but were replaced by the Organization for Economic Co-operation and Development (OECD) through the new Cabinet Resolution No 57 of 2020. The OECD’s main agenda is to control base erosion and profit-sharing practices, known as BEPS, and it is developing a 15-step action plan. There are at least 5 action plans that every OECD member country must follow, including harmful tax practices, also known as economic substance rules.
ESR objective for the UAE
The main objective of the economic substance rules is to regulate tax liabilities in the UAE through the relevant authorities. This is because many organizations, especially multinational corporations, save a lot of tax and take advantage of various low-tax jurisdictions. This amended regulation ensures that a company has a physical presence here and carries out all its business activities in the UAE, and not just a license that shows income in this country.
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The members of the amended ESR
There are many significant changes in the amended economic substance regulations, such as certain categories of businesses being required to comply with the ESR law. The ESR focuses in particular on companies operating and generating income on the mainland, offshore, free zones, and financial free zones. The main actors in the amended framework are listed below:
- Banking
- Insurance business
- Investment fund management business
- Rental and financing business
- Shipping
- Holding company business
- Intellectual property business
- Head office
- Distribution and service center business
- Businesses exempt from ESR
The amended Regulations clearly define exempt licensees that do not meet the UAE’s economic substance test. However, they still submit a statement that they are exempt from the ESR, together with documentation. A company will be an exempt licensee if it is established in the UAE, carries out relevant activities and:
Investment fund
Tax jurisdiction outside the UAE. A wholly-owned resident entity is a resident of the UAE and a person authorized in the UAE. Also not part of an international group and conducts all its business exclusively in the UAE.
A branch of a foreign entity whose income is taxable in the jurisdiction in which the foreign entity is incorporated.
In addition, the amended rules do not provide a specific exemption for entities that are at least 51% owned, directly or indirectly, by the UAE government.
Relevant authorities under the amended rules
These are the relevant authorities that will notify, examine and submit your ESR application:
- National Assessment Body
- Regulatory Authority
- Ministry of Finance
What does “qualifying substance” mean?
A qualifying substance has specific characteristics which means that the business activities concerned must comply with the notification, testing, and reporting requirements of the ESR. This is a key step in identifying a qualifying economic substance in the United Arab Emirates:
- Number of qualified employees
- Managed and operated in the UAE
- Expenditure in proportion to the business
- Physical presence in the UAE
- Corresponding physical assets in the UAE
- Income-generating core business UAE
- Economic substance regulation Full procedure
Filing an economic substance regulation in the UAE is a somewhat complex and lengthy procedure. However, it has a positive impact on the UAE economy as a whole, as well as contributing to the growth of your business. It is an essential process to comply with the ESR in accordance with all relevant authorities.
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ESR assurance and assessment
Firstly, we need to demonstrate that the company has the appropriate economic substance in the United Arab Emirates. We must also demonstrate that Core Income Generating Activities (CIGA) are carried out in the country. It is then necessary to assess what relevant activities are carried out and whether or not they require the introduction of ESR in order to carry on business in the UAE.
Submission of an ESR notification
A licensing company must notify the relevant authorities if it carries out any of these relevant activities in the UAE. The requirements and procedures for notifying the ESR are different for each licensing authority.
All companies are required to assess their ESR position and submit a notification to the relevant authorities. The Amended Resolution requires all licensees and exempt licensees to resubmit the ESR notification once on the Ministry of Finance portal. Each relevant authority has a different notification procedure. Some require it to be sent by email, while others have online portals.
Economic substance test
The economic substance test is carried out to validate the ESR information and documents provided. It confirms your appropriate economic substance for licensees, which determines whether or not the company is exempt or non-exempt from the amended resolution in the United Arab Emirates.
Annual ESR Reports
The final step is the submission of a report from only the companies that carry out these relevant activities. This should be submitted within 12 months of the end of the financial year to ensure that your ESR test is met by respected institutions.
Failure to comply with the ESR may result in:
ESR is mandatory for all licensees that fall within a specified business category in the United Arab Emirates. If anyone fails to comply with the amended ESR to the relevant authorities, they are liable to pay a fine of between AED 50,000 and AED 300,000. Also suspension of licenses as well as other administrative sanctions such as suspension, revocation or non-renewal of a company’s marketing license or permit.
How can Bestax help you with ESR compliance?
Bestax chartered accountants and consultants specialize in providing ESR services in Dubai, UAE. The team of experts helps you with in-depth knowledge of the relevant authorities and protects your business from any kind of penalties. Here are some of the benefits of choosing Bestax for your economic substance regulation application:
- Understanding your company and its scope to get economic substance regulation services in Dubai.
- Comprehensive assistance to help you meet your economic substance compliance obligations
- Assist you in notifying the economic substance regulations under the authorities
- Assure all relevant licensees that they are effectively complying with the tests of the economic substance regulations
- Accountants to help you prepare and submit your annual ESRs
- Commit to protecting your clients from penalties for non-compliance with the ESR
FAQs
How may businesses use Dubai’s Economic Substance Regulations services?
Businesses may make sure they successfully comply with regulatory standards by hiring consultants or specialised organisations in Dubai that have experience in Economic Substance Regulations compliance.
What are the advantages of using the services provided by Economic Substance Regulations?
Employing ESR services may assist businesses in avoiding fines, upholding regulatory compliance, improving transparency, and safeguarding their brand and commercial interests in Dubai.
How often must businesses submit reports about their adherence to the Economic Substance Regulations?
Every year, businesses are usually obliged to provide a report detailing their adherence to regulatory requirements, economic presence, and actions in relation to the Economic Substance Regulations.
Do the Economic Substance Regulations in Dubai have any exceptions?
Some or all of the ESR requirements may not apply to certain businesses, including holding corporations, investment funds, and entities with tax residences outside of the United Arab Emirates.
