Economic Substance Regulation (ESR)
ESR is defined as a set of standards that requires companies in the UAE to carry out business activities substantially in the country of their jurisdiction. The sole purpose of ESR would be to discard businesses with underlying intentions of registering their business to enjoy tax and economic benefits. In a country like Dubai, with highly favourable tax concession treatment, it’s logical that entities should establish stricter requirements to ensure sustainability in income generation.
In the United Arab Emirates (UAE), the Economic Substance Regulation (ESR) was introduced in line with international standards set by the Organisation for Economic Co-operation and Development (OECD) to ensure that businesses operating in the UAE have substantial economic activities within the country. The ESR applies to a wide range of licensees and entities conducting relevant activities.
ESR notification and reporting are two separate filings and an annual obligation for licensees that are within the scope of the ESR.
An entity is exempt from the report obligation for any financial period in which it has not earned income from a Relevant Activity or if it fulfills the conditions for being exempt, but the notification form must be submitted if the entity is carrying on a Relevant Activity.
ESR Notification and Reporting Deadline for June 2023
The deadline for the Annual Notification for the Financial year-end 30th December 2022 is 30th June 2023.
The deadline for the Annual Reporting for the Financial Year-end 30th June 2022 is 30th June 2023.
Key Industries to which ESR applies
- Fund Management
- Lease Financing
- Distribution and Service Centers
- Holding Companies
- Company Headquarters
- Intellectual Property Businesses
Manage Your Business from Within the UAE
With the new economic substance regulations, your managing director (or one of your company’s senior management) has to be based in the UAE. That essentially means they operate from the UAE full-time, and it must be within the specific activity in which the company has been set up. The size of your business does not affect this requirement.
If your company has a board of directors, you must be able to show that there have been UAE-based meetings and that minutes have been taken from these meetings.
Employ Full-Time Staff in the UAE
In addition to requirements for management, you must ensure that your employees are physically present in the UAE. (This doesn’t apply to outsourcing.)
Ensure Your Main Income is Generated Within the UAE
The work that your company does must be conducted from within the UAE. It’s acceptable if your clients are out of the country, but your key place of work should be the UAE.
Own Assets and Spend on Local Business Services
Your company needs to be spending an adequate amount of operating expenditure in the UAE. As with many of the regulations, it’s hard to gauge exactly how much or to put an exact figure.
When it comes to ownership of assets, it’s also a little unclear, but likely that assets will need to be declared. It’s true that ensuring you comply with these regulations does take some thought and some work. It’s part of the UAE’s ensuring that it continues to be a global hub for business, attracting the most prestigious companies from around the world and being fertile ground for entrepreneurs.
We have talked about the situation in terms of what it means for your company. Let’s end by looking at the government’s official announcement that brought these regulations into effect, outlining, as it does, how it responds to actions by the European Union:
As part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the “Regulations”) on 30 April 2019. Guidance on the application of the Regulations was issued on 11 September 2019 (Ministerial Decision No. 215 of 2019), and Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies lists the Regulatory Authorities tasked with the administration and enforcement of the Regulations. Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020, and updated Guidance was issued on 19 August 2020 Ministerial Decision No. (100) of 2020. The Regulations require UAE onshore and free zone companies and certain other business forms that carry out any of the defined “Relevant Activities” listed below to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (“Economic Substance Test”).
Your Free Zone Options
Now is the time to take your business to a new level at Meydan Free Zone, an economic district that boasts one of the most prestigious addresses in the country, close to the key commercial and financial hubs of Dubai.
With a great mixture of investment and lifestyle benefits, you can live and work in Meydan’s premium mixed-use developments – offering high-quality office spaces and elegant lifestyle communities.
And it couldn’t be easier to get started. All your individual business needs can be met with a smooth registration process, tailored packages, and assistance on-hand.