ESR (Economic Substance Regulation) is a legal obligation for all enterprises operating in the United Arab Emirates. The United Arab Emirates (UAE) Ministry first approved Cabinet Resolution No. 31/2019, which took effect on April 30th, 2019. Following that, for the year 2019, a Ministerial Decision 215 was issued, which contained orders for implementing the requirements of Cabinet Decision No. 31/2019.
However, on August 10th 2020, the UAE established a new Economic Substance Regulation by Cabinet Resolution 57/2020, which overturned and revoked Cabinet Decision 31/2019. Ministerial Decision 215 for 2019 was also repealed, favoring Ministerial Decision No 100 for 2020.
As a result, firms must now comply with Cabinet Resolution 57/2020 and Ministerial Decision 100 for 2020, which provide directions for executing the terms of Cabinet Resolution 57/2020.
UAE Economic Substance Regulations (ESR) Report & Notification: An Overview
- Offshore companies and businesses with a trade license in the UAE must inform the regulatory authorities whether or not they are conducting relevant operations in the UAE.
- The ESR Notification must be filed and submitted to the relevant free zone authorities by free zone firms. At the same time, mainland enterprises must notify the Ministry of Economy about the necessary operations they are taking out.
- In the UAE, the Ministry of Economy and free zone authorities jointly notify the dates for filing the Economic Substance Notification. Because ESR Notification is a statutory obligation in the UAE, all firms must comply.
Requirement For Economic Substance Test
Any Licensee who engages in a Relevant Activity and (ii) earns Relevant Income from such activity during a Financial Year must submit substantial economic substance in the UAE proportional to the nature of the Relevant Activity and the amount of Relevant Income earned.
To avoid doubt, a Licensee does not have to pass the Economic Substance Test (or file an Economic Substance Report) if it has no Relevant Income during the Financial Year. The Licensee, however, is still subject to the Notification obligation (Article 8, ESR Regulations).
What Is Relevant Income?
“Relevant Income” refers to the total entity’s gross income from a Relevant Activity as recorded in its books and records under applicable accounting standards, whether earned in the UAE or outside the UAE, regardless of whether the entity derived a profit or loss from its activities.
Key Economic Substance Test Requirements
To establish that it has sufficient substance in the UAE in a particular Financial Year, a Licensee must fulfill the following criteria:
1. The Licensee Engages In Core Income-Generating Activities (“CIGA”) In The United Arab Emirates
The CIGAs are the essential activities to the Licensee in generating gross income from its Relevant Activity. For every Relevant Activity, a Licensee is not required to undertake all of the CIGAs stated in the ESR Regulations. It must, however, conduct any of the CIGAs in the UAE that generate Relevant Income.
2. Directed And Managed criteria
The ‘directed and managed’ criteria ensures that a Relevant Activity is directed and managed in the UAE and requires, among other things, that an appropriate number of board meetings be conducted and attended in the UAE.
How Can I Submit An ESR Notice In The UAE?
ESR Regulations require mainland, free zone, and offshore enterprises to self-assess their respective operations and submit an ESR notice to their appropriate regulatory authority annually. For each relevant Financial Year, every Licensee and Exempted Licensee must send a Notification to their respective Regulatory Authorities detailing the following:
i. the nature of the Relevant Activity being carried out;
ii. Whether it generates Relevant Income;
iii. The date of the end of its Financial Year;
iv. Any additional information the Regulatory Authority may require.
An Exempted Licensee’s Notification must be supported by appropriate documentation to establish the Exempted Licensee’s status for each category from which it claims exemption.
Some Relevant Activities As Per UAE Economic Substance Regulations
Most of the companies in the UAE, including the mainland, free zone offshore, and the financial free zones come under the scope of the UAE Economic Substance Regulations. The companies need to comply with Economic Substance Regulations in UAE if they generate earnings from any of the relevant activities given below:
- 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
Exemption From UAE Economic Substance Regulations
The UAE Economic Substance Regulations specify the number of entities exempt from filing an ESR Report and passing the Economic Substance Test.
- Investment Funds and their underlying SPVs / investment holding organizations are among the ‘Exempted Licensees,’ including UAE corporations that are tax residents outside of the UAE.
- Wholly UAE resident-owned enterprises that are not part of a multinational group and solely do business in the UAE, and
- UAE branches of a foreign corporation – if the branch’s Relevant Income is taxed in the foreign jurisdiction – are also covered.
UAE firms held by the UAE government in the majority (51 percent or more) are no longer excluded from the UAE Economic Substance Regulations.
When To Submit Economic Substance Notification?
Exempted Licensees and Licensees who engage in any Relevant Activity during the financial term, regardless of any remuneration derived from the Relevant Activity, must file a Notification within six months of the end of the relevant financial period. All notifications must be filed online with the Ministry of Finance.
When And Who Must File An Economic Substance Report?
Only Licensees that make revenue from a Relevant Activity and are not excluded from the Regulations are obliged to demonstrate economic substance in the UAE and file an Economic Substance Report. Economic Substance Reports must be filed within 12 months after the conclusion of the financial period in question.
Economic Substance Regulations is a renowned Chartered Accountant business in Dubai, UAE, capable of meeting all of a company’s demands concerning Economic Substance Reporting in Dubai, UAE. Our highly skilled Chartered Accountants can assist businesses in determining whether or not they are subject to regulation.
We may examine their operations throughout the UAE to see if their present activities are projected to meet the UAE Economic Substance Reporting criteria. We can provide organizations with practical solutions to help them comply with the rules. We also support the company to create the notification and report that must be filed to the regulatory authority.
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