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All You Need to Know About ESR in the UAE: Your Ultimate FAQs Guide

February 10, 2023
Fortius Team
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Common Questions About ESR Answered by ESR Consultation Services

To fulfil its commitment to preventing illegal tax practices, the UAE initiated the economic substance regulations in April 2019. People in the UAE have been asking many questions about the economic substance regulations since they were first introduced. Our team at Fortius- one of the top-notch ESR consultation services has compiled some common inquiries regarding the ESR along with accurate answers to the same. Take a peek!

ESR in the United Arab Emirates: Frequently Asked Questions

1. Why did the UAE decide to implement the Economic Substance Regulations (ESR)?

The United Arab Emirates (UAE) primary motivation for enacting ESR regulations was to lessen the prevalence of illegal tax practices like tax evasion. Under these rules, businesses conducting certain Relevant Activities must establish a sufficient economic presence in the UAE to operate legally as onshore or free zone entities. Companies reporting profits in the United Arab Emirates (UAE) are expected to demonstrate economic activities in the country commensurate with those reported profits.

2. Can the Trade licence be used to infer whether or not the Economic Substance Regulations (ESR) apply?

No. Regardless of what the commercial Licence lists as the company's primary focus, it would be subject to the Regulations if it was engaged in a Relevant Activity. Even though the commercial licence may explicitly state the Relevant Activity, a "substance over form approach" must be used to determine if the Licensee is engaging in a Relevant Activity and thus subject to the Regulations.

3. What must organisations which fall under the ES Regulations do?

Organisations should adhere to the below mentioned steps:

  • A Notification must be filed and submitted annually, by six months after the end of the applicable fiscal period.
  • The deadline for filing the Report on Economic Substance is 12 months after the end of the fiscal year.
  • To pass the Economic Substance Test, a licensee must show that it is being managed and run from the United Arab Emirates, that it's Core Income Generating Activities (CIGAs) take place in the UAE, and that it maintains adequate resources (including personnel, capital, and physical space) in the country.

4. According to the ESR Regulations, who are considered licensees and who are not?

Any business entity, including a partnership, limited liability company, a public or private company with shares, or a joint venture, can be a licensee. A licensee cannot be an individual, a sole proprietorship, a foundation, or a trust.

All of the following qualify as exempt licensees:

  • Holding company that invests its licence fees
  • A licensee who files their taxes in a different country
  • An overseas licensee that pays taxes on its relevant income in a country other than the United Arab Emirates.
  • In contrast to licensees that are part of Multinational Enterprise (MNE) Groups, those owned by UAE nationals are restricted from doing business within the UAE itself.

5. What happens during a fiscal period (5) if a Licensee does not engage in a Relevant Activity?

A Licensee is exempt from the Economic Substance Test if it does not engage in a Relevant Activity during the reporting period. In that case, the Licensee would not have to file a Notification or an Economic Substance Report for the given accounting period.

6. What information must be reported annually to the regulatory body?

The annual notification submitted to the regulatory authority by all Licensees and exempted Licensees must contain the following details:

  • Date(s) of its fiscal year(s) beginning and ending
  • Relevant activity that was carried out during the applicable fiscal year
  • Whether the entity has carried our relevant activity during the concerned accounting period
  • Any other pertinent information as desired by the the regulatory authorities
  • In addition, exempt licensees must submit any documentation supporting their claims of exemption.

7. What requirements must the Licensee fulfil to pass the ESR Regulations' Economic Substance Test?

The following requirements for the Economic Substance Test must be met by any licensee who is not exempt:

  • CIGAs must be performed in the territorial borders of the UAE..
  • The Relevant Activity must be directed and managed from the UAE to be legally valid.
  • To qualify as a licensee, the licensee's extent of relevant activity must have:
  1. Sufficient number of full-time, highly qualified employees currently based in the UAE and engaged in said activity.
  2. Adequate assets and properties within the UAE
  3. Sufficient expenses incurred by the entity within the UAE

8. Is filing an Economic Substance Report always necessary, or are there circumstances where a company needs only to file a Notification?

The answer is yes if the Licensee is an Exempted Licensee or does not derive any revenue from its Relevant Activity. There is no need to submit an Economic Substance Report if this describes the situation.

When you submit a Notification through the Economic Substance Filing Portal, the system will determine whether or not you are required to submit an Economic Substance Report and will only generate a report if you are actually exempt.

9. Suppose an organisation's “Exempt Status” application is rejected after the initial filing deadline for the Economic Substance Report for the relevant financial period. Will they be subject to a late filing penalty?

Companies that knowingly, deliberately, and intentionally file false exemption claims may be subject to sanctions. Suppose your request for a waiver of the Economic Substance Regulations is denied after you submit a Notification. In that case, you will have 30 business days from the date of the denial to file your Economic Substance Report.

10. Do government agencies have to comply with ESR laws?

Neither the UAE government nor its agencies are covered by or subject to ESR. Also exempt from ESR are entities wholly or partially owned by the federal government. At least 51% of any business or organisation that receives government or national authority funding must be owned by the government or authority.

11. Do the rules apply to remote/ satellite offices?

A UAE branch office is merely an extension of the parent company; it is not a separate entity. Because of this, the UAE "parent" or "head office" must submit as a single Licensee, reporting the Relevant Activities and all of its branches in a single Notification and Economic Substance Report.

12. How do I change information in my previously submitted ESR Notification or ESR Report?

Changes to an ESR notification that has already been submitted can be made through the ESR Portal of the Ministry of Finance. If you need to make any changes to your previously filed ESR notification, you can do so through the "Request for amendment" button on the Licensee Dashboard page. However, you must contact the relevant regulatory body if you need to make changes to an ESR Report that has already been submitted.

13. What must I do to ensure I comply with ESR regulations before the end of the fiscal year?

Before the end of the fiscal year, a legal entity must complete the following tasks:

  • Evaluate its performance based on the work it has done rather than just the paperwork submitted.
  • Ensure it has earned material income based on the results of these activities during the fiscal year
  • Verify if a majority of the board has ever met in person in the UAE.
  • Verify that it has the signed minutes from all board meetings held in the UAE.
  • Ensure there are sufficient number of full-time workers in the UAE who help carry out the relevant activities
  • Specify the details about the activity's assets and costs.
  • Ensure it can control and supervise the outsourced activity in any outsourcing arrangement.

Parting Thoughts

With this blog we have answered some of the most relevant and important questions pertaining to ESR in the UAE. We aim to ensure that businesses benefit substantially by being aware of these facts. At Fortius, we have a dedicated and experienced team that helps various legal entities figure out their way around ESR compliance in the UAE. To start or streamline your ESR journey give us a call today!

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