Economic Substance Regulations (ESR) in UAE

ESR is a set of regulations introduced by the UAE to align with international standards and combat base erosion and profit shifting. The primary objective is to ensure that businesses operating in the UAE demonstrate substantial economic activity within the country. The key laws governing ESR include:

Cabinet Resolution No. 31 of 2019: This resolution outlines the guidelines and requirements for ESR implementation in the UAE.

Ministerial Decision No. 215 of 2019: This decision provides further clarity on the activities falling within the scope of ESR and the reporting obligations.

Purpose of ESR in UAE

ESR aims to ensure that businesses engaged in relevant activities have a substantial presence in the UAE, promoting fairness and discouraging profit shifting. Also, compliance with ESR strengthens the UAE’s commitment to international tax standards and fosters cooperation with other jurisdictions.

Organizations Obligated to Comply with ESR – Who Needs Economic Substance Advisory

Relevant Activities: Businesses involved in activities such as banking, insurance, fund management, leasing, intellectual property, and holding company activities are subject to ESR.

Licensees: Entities holding commercial licenses or licenses issued by regulatory authorities fall within the scope of ESR.

Penalties and Risks for Non-compliance

Monetary Penalties: Entities that fail to meet the economic substance test or submit the required reports may face financial penalties. If a licensee or exempted licensee in the UAE does not submit an ESR notification, they may be subject to an administrative penalty of AED 20,000. If they fail to pass the Economic Substance Test, they may face an administrative penalty ranging from AED 10,000 to AED 50,000.

Reputational Damage: Non-compliance with ESR regulations can result in significant reputational damage for businesses. This can include negative publicity, loss of trust from clients, partners, and investors, and potential harm to the business’s brand and image.

First Reportable Period

The first reportable period for ESR compliance in the UAE is crucial. It requires entities to assess their economic substance, prepare the necessary reports, and submit them within the specified timeline.

UAE Economic Substance Advisory by IAZ Business Solutions.

ESR Assessment: We conduct a thorough assessment of your business activities, identifying any gaps and recommending measures to achieve compliance.

ESR Compliance: Our experts assist you in developing robust frameworks, policies, and procedures aligned with ESR requirements, ensuring adherence to economic substance criteria.

ESR Appeals: In the event of a dispute or non-conformity, we provide guidance and representation during the appeals process, helping you resolve any concerns efficiently.

We understand the complexities and importance of Economic Substance Regulations. Our dedicated professionals stay updated with the latest regulations, ensuring that your organization remains compliant and well-prepared for any challenges.