The UAE implemented the Economic Substance Regulation (ESR) to prevent harmful tax practices and enhance tax transparency, reflecting its commitment as a member of the OECD Inclusive Framework on BEPS (Base Erosion and Profit Shifting). Consequently, mainland, offshore, and free zone companies registered in the UAE must demonstrate adequate economic presence in the country. Businesses engaged in Relevant Activities are required to submit the ES notification and report annually to the authority.
ESR in the UAE explained
ESR requires companies earning income in the UAE to demonstrate they have a substantial base of operations in the country. This translates to having a proportionate level of:
- Infrastructure: Physical office space, equipment, and technology necessary to support the revenue-generating activities.
- Employees: A qualified workforce in the UAE with the expertise to handle the relevant activities.
- Expenditures: Operating expenses commensurate with the level of activity and income generated in the UAE.
The emphasis is on demonstrating a genuine economic connection to the UAE, not just mailbox operation.
Who must comply with ESR in the UAE?
ESR applies to a broad range of entities if they conduct any ‘Relevant Activities’, including:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Distribution and Service Centre Business
Determining your Branch’s ESR Applicability
A meticulous approach is required to determine if your branch falls under ESR. Here’s a more detailed breakdown of the process:
- Scrutinize Relevant Activities: Carefully examine the list of relevant activities and assess if your branch engages in any of them, even partially.
- Evaluate Activity Level in the UAE: Conduct a thorough evaluation of your branch’s operations within the UAE. This includes:
- The number of employees dedicated to the relevant activity in the UAE.
- The value and location of physical assets used for the activity in the UAE.
- The overall scale and nature of the relevant activity conducted within the UAE compared to global operations.
- Verify “Licensee” Status: ESR applies to businesses holding a valid license to operate in the UAE. If your branch has a license, it’s highly likely to be subject to ESR.
- Explore Exemption Criteria: There are exemptions for certain entities, such as:
- Branches of foreign businesses that are tax-resident and pay taxes on all relevant income in another jurisdiction.
- Wholly UAE-owned businesses that operate solely within the UAE and are not part of a multinational group.
It’s crucial to carefully examine the exemption criteria and ensure you meet all the requirements before claiming exemption.
Complying with ESR in the UAE: Reporting requirements
If your branch needs to comply with ESR, you’ll be required to submit reports to the Federal Tax Authority (FTA), the designated authority for collecting ESR information. These reports will detail:
- Branch Information: Legal name, trade name, trade license details, etc.
- Activities: A clear description of the relevant activities undertaken by the branch.
- Financial Information: Financial statements and relevant financial data specific to the branch’s activities in the UAE.
- Employee Details: The number of employees engaged in the relevant activities within the branch.
- Physical Assets: The value and location of any physical assets used by the branch for the relevant activities.
- Core Income-Generating Activities (CIGAs): A clear identification and explanation of the specific activities that generate the relevant income for the branch in the UAE.
- Economic Substance Test Compliance: A confirmation that the branch has met the ESR requirements and any supporting documentation to substantiate this claim.
Penalties for non-compliance with ESR in the UAE
Failure to submit the ES notification: AED 20,000
Failure to submit the ES report: AED 50,000
Failure to submit the ES report for the consecutive year: AED 400,000
Providing inaccurate information: AED 50,000
Remember these Key Points on ESR Filings in the UAE
- ESR applies to all UAE entities conducting relevant activities, not just foreign-owned companies.
- There’s no general exemption for offshore companies; they are subject to ESR if involved in relevant activities.
- Legal documents don’t solely define ESR applicability. A “substance over form” approach prevails, focusing on actual activities.
- Regularly assess your branch’s activities to ensure continuous compliance with ESR.
- Proper documentation is essential when claiming exemptions under ESR.
- ESR filing is mandatory regardless of whether the relevant activity generates income for the branch.
- Penalties exist for non-compliance, including failing to submit notifications and reports or providing inaccurate information.
How MS can help you file ESR in the UAE
Remaining mindful of ESR deadlines is essential to avoid incurring penalties and facing other negative consequences. At MS, we are dedicated to supporting you throughout the entire process. Our efficient and comprehensive services are designed to help you determine if your business engages in Relevant Activities, making ESR filings straightforward and stress-free. By ensuring compliance with all ESR requirements, we can help you prevent any potential penalties.
Don’t let uncertainty hold back your compliance efforts. By partnering with us, you can safeguard your business’s future and maintain its financial health. Our team of experts is ready to provide you with the guidance and support you need to navigate the complexities of ESR regulations the UAE.
Disclaimer
Please be advised that the conditions specified in the register are subject to revisions based on any modifications made to the schedule of contraventions by the UAE authorities. These revisions may arise due to updates in regulatory requirements, policy amendments, or other factors deemed necessary by the UAE Government.
