Impact of UAE’s Economic Substance Regulations (ESR) Compliance on Business

In the UAE, Economic Substance Regulations (ESR) apply to many businesses in Dubai and other emirates. These regulations help companies to maintain their economic presence in the UAE. By following the ESR guidelines, companies can ensure they are financially compliant and avoid unfair tax practices. Businesses must pass the ESR test for Environmental, Social, and Governance standards.

To meet ESR requirements, companies must earn revenue from their core UAE corporate tax registration. They need enough workers, physical space, and financial resources to cover their expenses. Both eligible licensees and exempt businesses must take the ESR test. Passing the test shows a company’s financial responsibility. The Federal Tax Authority (FTA) oversees compliance and can impose penalties for non-compliance.

Impact on International Businesses

The ESR standards have several effects on international businesses in the UAE. Here are the key points:

• Alignment with International Standards: The UAE’s adoption of ESR aligns it with global standards, preventing tax avoidance and profit shifting. This makes the UAE a reliable and transparent business hub, attracting foreign investments.
• Corporate Structure Evaluation: Companies must reassess their corporate structures to meet ESR requirements. This ensures they comply with regulations, improve operational efficiency, and adapt to the financial regulatory environment.
• Operational Adjustments: Businesses are making changes to comply with ESR, like increasing staff, expanding physical presence, and enhancing operations within the UAE. This commitment supports the local economy and ensures compliance.
• Improving Transparency: ESR promotes transparency by requiring detailed disclosures about business activities and financial performance. This helps stakeholders understand a company’s contributions and operations, building trust.
• Ensuring Compliance: Companies must ensure financial compliance to avoid risks like monetary penalties, operational sanctions, and dubai silicon oasis license.

Relevant Activities Under ESR

UAE mandates that companies performing specific activities follow ESR standards. These activities include:

• Banking
• Insurance
• Investment Funds Management
• Lease Finance Business
• Headquarters Operations
• Shipping
• Holding Company Activities
• Intellectual Property Business
• Distribution and Service Centers

ESR Compliance: Notification and Reporting

All entities performing relevant activities must file an ESR Notification on the MOF Portal within six months after the end of their financial year. Even entities in liquidation must file before completing the process.

Filing an ESR Report

Entities not exempt and earning from relevant activities must file an ESR report within 12 months after their financial year ends.

Exempt Entities

Some entities are exempt from filing an ESR report but must still issue an ESR notification. These include:

• Entities 100% owned by UAE nationals or residents, operating only in the UAE
• Licensees tax resident outside the UAE
• Investment Funds and their holding companies
• Branches of foreign companies taxed in their parent company’s jurisdiction
• Special purpose vehicles (SPVs) and investment holding companies

Deadlines for ESR Notification and Reporting

Here are the upcoming ESR notification and reporting deadlines:

Importance of the Economic Substance Test

The ESR standards require businesses to pass the Economic Substance Test, which shows that they are conducting core income-generating activities within the UAE. Companies must demonstrate adequate staffing, appropriate premises, and financial resources in the UAE.

Consequences of Non-Compliance

Non-compliance with ESR guidelines can lead to several penalties:

• Fines for failing to file an ESR notification
• Penalties for not submitting an ESR report
• Fines for failing the Economic Substance Test
• Penalties for submitting false ESR information

How NH Management Can Help?

At NH Management, we understand the complexities of complying with ESR in the UAE. Our experienced professionals are here to help your business navigate these regulations successfully. We offer comprehensive consulting services to ensure your company meets all ESR requirements.

Our Services

• Company Incorporation: We assist with setting up your business in the UAE, ensuring compliance with all local regulations.
• ESR Compliance: We help you understand and meet ESR requirements, from filing notifications to passing the Economic Substance Test.
• Tax Consulting: Our experts provide guidance on UAE corporate tax registration and offer services as corporate tax consultants.
• Free Zone Licensing: We assist with obtaining licenses in various free zones, including DMCC Free Zone and Dubai Silicon Oasis.
• Cryptocurrency Licensing: We help businesses acquire cryptocurrency licenses in Dubai.

ESR Compliance with NH Management

At NH Management, we are dedicated to honesty, transparency, and ethical conduct. We believe in delivering value to our clients through customized, high-quality consulting services. Our commitment to diversity and inclusion drives innovation and excellence in all our work.

Understanding and complying with the UAE’s Economic Substance Regulations (ESR) is crucial for maintaining your business’s reputation and avoiding penalties. Your business can thrive in the UAE by aligning with international standards, reassessing corporate structures, making operational adjustments, improving transparency, and ensuring financial compliance.

NH Management is here to support your business every step of the way. Our comprehensive consulting services ensure you meet all regulatory requirements while maximizing your business potential. Trust NH Management to be your partner in success in the UAE.

For more information on how we can assist with UAE corporate tax registration, obtaining a DMCC free zone license, Dubai Silicon Oasis license, or a cryptocurrency license in Dubai, contact us today.

FAQs 

What are the UAE Economic Substance Regulations (ESR)?

The UAE Economic Substance Regulations (ESR) are a set of guidelines introduced to ensure that companies engaged in specific activities have substantial operations in the UAE. These regulations aim to prevent harmful tax practices and align with international standards.

Who needs to comply with the ESR?

All entities in  the UAE that conduct relevant activities such as banking, insurance, investment funds management, lease finance, headquarters operations, shipping, holding company activities, intellectual property business, and distribution and service centers must comply with the ESR.

What is the purpose of the ESR in the UAE?

The purpose of the ESR is to ensure that companies engaged in relevant activities have a substantial economic presence in the UAE. This helps prevent tax evasion and promotes transparency and fairness in the business environment.

What is an ESR Notification, and who needs to file it?

An ESR Notification is a declaration that entities conducting relevant activities must file on the Ministry of Finance (MOF) Portal within six months after the end of their financial year. This notification confirms whether the entity is engaged in relevant activities and if they meet the economic substance requirements.

What is an ESR Report, and when should it be filed?

An ESR Report is a detailed submission of financial information and operational data for entities conducting relevant activities. This report must be filed within 12 months after the end of the financial year, detailing the entity’s compliance with ESR requirements.

What are the consequences of failing to comply with the ESR?

Non-compliance with ESR can result in significant penalties, including fines for failing to file notifications or reports, penalties for failing the Economic Substance Test, and penalties for submitting false information. Additionally, companies may face operational sanctions and license suspensions.

What are Core Income-Generating Activities (CIGAs)?

Core Income-Generating Activities (CIGAs) are specific income-generating activities that must be conducted in the UAE by entities subject to ESR. Examples include underwriting insurance risks, managing investment funds, shipping operations, and holding intellectual property.

Are there any entities exempt from filing an ESR Report?

Yes, certain entities are exempt from filing an ESR Report but must still submit an ESR Notification. Exempt entities include those wholly owned by UAE nationals or residents, tax residents outside the UAE, investment funds, branches of foreign companies taxed in their parent company’s jurisdiction, and special purpose vehicles (SPVs).