The Economic Substance Regulations, better known as ESR guidelines, are a set of compliance requirements that certain companies in the UAE need to follow. The ESR process became a part of the Emirati compliance measures in 2019 by an order by the UAE Ministry. Hence, all companies who have licenses for Relevant Activities are eligible to follow these guidelines from 2019 onwards. Recently, the UAE government released a new resolution bringing about amendments to the original guidelines. The latest updates will replace the older rules, and hence, all the eligible companies must keep themselves updated regarding these changes. In this article, we will take a look at how ESR consultants can help with maintaining government compliance, and how KGRN can help you with them.

What is the Economic Substance Regulations Guideline?

The Economic Substance Regulations guidelines are a new type of compliance measure that the UAE implemented in 2019. The move for such a guideline was as a result of the UAE’s continued effort to better itself as a part of the Organisation for Economic Co-operation and Development. Following the EU’s assessment of the Emirati taxation system, the UAE brought out these guidelines to help with ensuring the highest standards for Base Erosion and Profit Shifting.

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What is the Economic Substance Regulations Test?

As per the Economic Substance Regulations guidelines, the companies that engage in Relevant Activities as mentioned below will have to clear an Economic Substance Test successfully. Hence, such companies must do the following;

  1. Firstly, analyze their core income-generating activities
  2. Secondly, be as well-directed and managed as possible
  3. Thirdly, the Licensee’s activities must have adequate local Economic Substance, which mainly consists of;
  • Full-time employees
  • Operating Expenditure
  • Premises/Physical Assets
  1. If the company qualifies and meets the ES test, they must then notify the appropriate Regulatory Authority depending on where their office is situated.
  2. They will also have to file an Economic Substance Return within 12 months before the end of the fiscal year.

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What are Relevant Activities?

Here’s a look at the activities that come under the tag of Relevant Activities in the UAE;

  1. Banking
  2. Insurance
  3. Investment Fund management
  4. Distribution and Service Centre
  5. Lease – Finance
  6. Headquarters
  7. Shipping
  8. Holding Company
  9. Intellectual property Business

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Significant Changes Brought In By The Amendment

So, what exactly did the Amended Regulations change? Here’s a quick look at the most critical updates that were a part of the Amendment.

  1. Firstly, a change in the definition of the term licensee
  2. Secondly, a need for compulsory re-notification through the MOF portal
  3. Thirdly, the Federal Tax Authority became the National Assessing Authority
  4. Furthermore, the National Assessing Authority will have the power to oversee ESR compliance and regulation
  5. Also, there are changes in Exemption rules for ESR-compliance 
  6. Changes in the definition of a distribution and service centre business
  7. Lastly, more clarity on what the terms Branches and Connected Person means

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What are the penalties for non-compliance?

Here is a look at the administrative penalties that companies will have to face if they do not meet the required compliance measures as per the Amended Regulations;

Offence Penalty
Does not submit the notification or relevant authority AED 20,000  
Does not submit the ESR report Does not meet the Substance Test annually AED 50,000 And AED 4,00,000 for repeat offence
Submit inaccurate information on purpose AED 50,000

How Can KGRN Help?

Now that you know about the Economic Substance Regulations guidelines and why they are essential let us take a quick look at how an ESR Consultancy firm like KGRN can help you. KGRN Chartered Accountants is one of UAE’s most prominent and well-known business consultancy and audit firms. Also, our team of experts have enough knowledge and expertise to help you gain a clear understanding of how ESR guidelines work. They are well-versed with the new amendment, and continuously keep themselves updated regarding changes in rules. Hence, these experts will be able to guide you with maintaining compliance and ensuring you stay free of legal hassles.

Furthermore, KGRN’s chartered accountants will conduct an impact analysis, taking into consideration the ESR rules and your business processes to ensure that complete compliance is met. Also, our team can help with the correction of errors, rectification and filing of the required ESR returns. As a result, we will be able to identify all the gaps in your current system and help you create one that is efficient and compliant. Hence, partner with us, at KGRN Chartered Accountants, to make sure you stay ahead of the competition and on the right path to success.

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