Economic Substance Regulations(ESR) Dubai UAE

The UAE brought into force Economic Substance Regulation UAE via a Cabinet of Ministers Resolution on April 30th, 2019. The government further released a Ministerial Decision containing guidance on how to apply these regulations on September 11th, 2019. After consulting with the EU and OECD, the UAE made amendments to the ESR in UAE.

These were brought into force via a Cabinet of Ministers Resolution on August 10th, 2020. Additional guidance regarding the amendments came out through a Ministerial Decision, which was the 100th of the year. The ESR compliance UAE received a broader definition through this Amended Guidance which had a detailed guide on the Relevant Activities for ESR.

Federal Entities or Regulatory Authorities

• Ministry of Economy
• Central Bank
• Insurance Authority
• Security and Commodities Authority

The Relevant Activities as per the Economic Substance Regulations UAE are businesses which
engage in the following activities:

1. Banking
2. Insurance
3. Investment Fund Management
4. Lease-Finance
5. Headquarters Businesses
6. Shipping
7. Holding Company
8. Intellectual Property Businesses
9. Distribution and Service Centre

UAE businesses which work in the sectors mentioned above must use Substance Over Forms
to determine whether they are eligible for the ESR guidelines. To do so, businesses must
assess all the activities they performed in one financial year, and not just the ones mentioned on
their commercial licence.Also, as per the Economic Substance Regulations UAE, businesses need not be actively engaged in these categories to be eligible for ESR.

Even a passive income through a finance lease makes the business liable to follow ESR in UAE. ESR compliance UAE mandates that businesses who carry out multiple relevant activities must demonstrate economic
substance for each one. In some cases, ESR in Dubai allows companies to consolidate their ancillary Relevant Activities to prevent multiple or duplicate reporting.

A Licensee is any juridical person, or unincorporated business or partnership registered and eligible for ESR in UAE. Hence, it includes all individuals, persons, and partnerships that engage in a Relevant Activity in the UAE. Hence, as per Economic Substance Regulations UAE, a License may be any one of the following;

1. Limited Liability Company – LLC
2. Private Limited Company
3. Public Limited Company
4. Joint Venture Company
5. Partnership Firm

However, as per Economic Substance Regulations Dubai, the following persons do not fall under the category of Licensee;

• Natural Person
• Sole Proprietorship
• Trust
• Foundation

When a notice says, ‘subject to the Economic Substance Regulations UAE’, it means the following;

1. All Licensees that engage in and generate an income from a Relevant Activity must file
   an annual Notification. As per ESR in Dubai, such a notification must reach the
   Regulatory Authority six months before the end of the fiscal period.
2. Additionally, to maintain ESR Compliance UAE eligible licensees must file an Economic
   Substance Report. As per Economic Substance Dubai guidelines, the licensees must do
   so within 12 months from the end of the determined period.
3. When it comes to demonstrating substance, for every period a Licensee generates
   income via a Relevant Activity, it must fulfill an Economic Substance Test.

An Economic Substance Test will need the Licensee to demonstrate the following as per Economic Substance Regulations Dubai;

1. All the Licensee’s Relevant Activities are directed and managed within the UAE
2. All the Core Income Generating Activities occur within the UAE
3. Licensee hires enough people, has adequate remises and meets the expense criteria in the UAE as per the Economic Substance Regulation UAE

The Economic Substance Regulation UAE applies to all business entities and partnerships that engage in a Relevant Activity within the UAE. They apply throughout the country, in both Free Zones and Financial Free Zones alike.

Hence, ESR in Dubai extends to all entities located onshore and in Free Zones in case they generate an income from a Relevant Activity. For instance, ESR compliance with UAE regulations in the DIFC extends to all entities that conduct a Relevant Activity within the jurisdiction of the DIFC.

This is regardless of their business structure type or operational size. Hence, the DIFC serves as the Regulatory Authority and enforcer of the Economic Substance Regulations Dubai in its zone. Since branches registered in the UAE act as an extension of the primary or parent branch, they do not have a separate legal existence.

Hence, if the parent company is in the UAE, it must file one composite Notification and Report containing details of all its branches. However, a branch of a foreign entity must comply with the Economic Substance Regulations UAE, unless the income falls under taxation of the head office jurisdiction.

This test is met when the branch’s income is used to calculate the patent office’s taxable income. Also, when the branch is registered outside the nation, the entity does not have to consolidate its activities to comply. However, this holds only if the income from the foreign branch faces taxation under a foreign jurisdiction. Additionally, the Economic Substance Regulations Dubai acts on entities belonging to foreign multinational groups.

As per ESR in Dubai, the Reportable Period serves as the financial period, which begins from January 1st, 2019. All entities must include their start and end dates while mentioning their Reportable Period on the MOF Portal. Let us now consider a few examples which highlight the Reportable Period for Economic Substance Regulation UAE purposes.

Any business whose Incorporation Date falls on February 10th, 2010 and has a financial year-end on December 31st, will have the following Reportable Period:

• Start date: January 1st, 2019
• End date: December 31st, 2019

Any business whose Incorporation Date falls on July 1st, 2019 and has a financial year-end on March 31st, 2020 will have the following Reportable Period:

• Start date: July 1st, 2019
• End date: March 31st, 2020

Any business whose Incorporation Date falls on June 1st, 2018 and has a financial year-end on December 31st, 2019 will have the following Reportable Period:

• Start date: January 1st, 2020 for any period after January 1st, 2019
• End date: December 31st, 2020

1. Consultancy services regarding ESR guidelines
2. Helps companies identify whether they qualify for Economic Substance Regulation
3. Identify which business segments qualify for ESR compliance
4. Report and help achieve ESR readiness with ease
5. Facilitate and help with ongoing Economic Substance Regulation compliance
6. Secretarial services and record maintenance for ESR compliance
7. Economic Substance Regulation filing in the proper format

As mentioned above, KGRN offers one of the UAE’s best ESR services. We can help companies gauge whether they are eligible for the guidelines and if so, help them meet the predetermined guidelines with ease. Our experts also help companies maintain accurate records and file all required compliance documents. Partner with KGRN and meet all your ESR requirements with ease!

The Economic Substance Regulations UAE have the following compliance requirements; An entity carrying out Relevant Activities must:

1. Demonstrate substance using an Economic substance test
2. File a Notification six months before the end of the Reportable Period
3. File an Annual Substance Report/Return with detailed information within 12 months of the end of the financial period

ESR Filing UAE: Any licensee who undertakes one or more Relevant Activity and generates a Core Income from it during a financial year must file a Notification under the Economic Substance Regulation UAE. The Relevant Activities include;

1. Banking
2. Insurance
3. Investment Fund Management
4. Lease-Finance
5. Headquarter
6. Shipping
7. Holding Company
8. Intellectual Property Business
9. Distribution and Service Centre

Only entities of the following kind are exempt from filing a Notification as per the Economic Substance Regulations Dubai;

1. Dissolved. or
2. Struck-off, or
3. Liquidated before the submission deadline for Notification

As per Amended ESR in Dubai, the following Licensees are exempt from filing a report, but
must file a Notification;

1. Tax resident outside the UAE
2. Investment Funds
3. Wholly owned by Emirati residents
4. Nott part of a multinational group
5. Business activities only in the UAE or branch of a foreign company that pays corporate tax outside the UAE

Any one of the following might occur if you don’t file a Notification before the deadline as per the

Economic Substance Regulations UAE;

1. Payment of a penalty or fine
2. Suspend the trade license
3. Withdrawal or non-renewal of the business license

Here’s a list of the penalties companies are liable to pay under the Economic Substance Regulation UAE;

1. Does not file a Notification – AED 20,000
2. Does not submit a Report or documentation – AED 50,000
3. Does meet Economic Substance Test – AED 50, 000
4. Provides inaccurate information – AED 50,000
5. Second consecutive year of failure – AED 400,000 along with other action

As per the Economic Substance Regulations Dubai, if a licensee does not engage in a Relevant Activity, it need not meet the Economic Substance Test. The Licensee will also not have to submit a Notification or Economic Substance Report for that period.