A Licensee is any juridical person or unincorporated partnership registered in the UAE that conducts Relevant Activities. This includes: Limited liability companies Private and public shareholding companies Joint venture companies Partnerships (limited liability, limited, general) Exclusions: Natural persons, sole proprietorships, and certain trusts and foundations, unless they undertake Relevant Activities.

ESR SERVICES IN
THE UAE & THE GCC

ESR SERVICES IN
DUBAI, ABU DHABI
& THE UAE

Current Law:

DATE: SEPTEMBER 16, 2024 - IMPORTANT UPDATE: KEY AMENDMENTS TO THE ECONOMIC SUBSTANCE REGULATIONS (ESR)

The UAE Cabinet Decision No. (98) of 2024, published on September 16, 2024, introduced several key amendments to the Economic Substance Regulations. Key highlights include:

Extended ESR applicability for financial years from 2019 to 2022.
Waiver of penalties for exempt businesses up to December 31, 2022.
Relief on penalties after December 31, 2022, for entities meeting national compliance obligations.

These updates provide crucial relief, particularly with the UAE’s corporate tax regime now in place.

We offer an ESR Assessment to evaluate each entity’s eligibility and compliance status. Secure your free consultation today.

Our ESR service in Dubai, Abu Dhabi and the UAE is part of our tax consultancy services in Dubai, Abu Dhabi and the UAE.

On 30 April 2019, the United Arab Emirates (“UAE”) Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 (concerning economic substance regulations in the UAE, “the Regulations”). The introduction of the Regulations requires relevant UAE entities that perform certain business activities to be able to demonstrate economic substance in the UAE as of 30 April 2019.

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**Overview of Historical Law (No Longer in Effect):**

WHAT ARE THE ECONOMIC SUBSTANCE REGULATIONS (ESR)?

The Economic Substance Regulations (ESR) are laws introduced by the UAE to ensure that entities conducting specific business activities within the UAE demonstrate substantial economic presence in the country. These regulations were designed to align with global standards and prevent base erosion and profit shifting. They require businesses to show that their profits are proportional to the economic activities performed within the UAE.

WHY WERE ECONOMIC SUBSTANCE REGULATIONS INTRODUCED IN THE UAE?

ESR were introduced to fulfill the UAE’s commitments under the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The regulations address concerns raised by the European Union regarding the UAE’s tax practices. They ensure that profits are taxed where the actual economic activities generating the profits occur, reflecting the UAE’s dedication to adhering to international tax standards.

WHO WILL NEED TO COMPLY WITH ESR?

The substance requirements will apply to all UAE onshore and free zone companies that undertake the below-listed Core-Income Generating Activities (“CIGA”) in relation to the following known as “Relevant Activities”:

FINANCE AND LEASING BUSINESS

Agreement on funding terms including the type of fund, amount of funding, currency, interest rates, security given, and covenants if any.
Identifying and purchasing assets for leasing purposes.
Negotiating and setting the terms and duration of financing and leasing.
Monitoring and revising any financing and leasing agreements.
Managing of any risks related to financing and leasing activity.

INVESTMENT FUND MANAGEMENT ACTIVITY & BUSINESS

The activity is related to Discretionary Investment Management Services, in which investment management is made on behalf of clients and given that it is a self-managed fund where the Investment Manager and the Investment Fund are of the same entity.

Making independent decisions related to holding and selling of investments.
Calculating risks and reserves.
Taking decisions on hedging arrangements against currency and/or interest fluctuations.
Preparing reports to private investors or government authorities related to the investment fund management, supervision and regulation of the business.

BANKING RELATED BUSINESS

Raising funds, raising capital, issuing bonds, managing risks, accepting deposits of money from the public.
Hedging.
Providing or giving of loans, credit, advances, overdrafts, guarantees or similar activities.
Making of investments and managing capital of private investors and government authorities.

INSURANCE RELATED BUSINESS

Predicting and calculating risk.
Insurance or re-insurance against risk including captive insurance.
Underwriting insurance and re-insurance.

HOLDING COMPANY BUSINESS

A Holding Company would need to meet its required economic substance if its activities are related to the acquisition and holding of shares or equitable interest in other companies and it does not carry any additional or other commercial activity. In case, a holding company business carries another activity, then it will need to meet the economic substance requirements of the different Relevant Activity category (if falls within the CIGA scope of the Regulations).

HEADQUARTERS BUSINESS

The company will be considered as a headquarter business if it provides the following CIGA to foreign group companies; in disregard to whether the company is the direct or ultimate parent company of the group or is engaged in a different industry/business nature.

Taking relevant management decisions.
Purchasing significant assets or services on behalf of the group entities.
Coordinating the functions of the group entities including marketing, HR, IT, and Finance etc.

INTELLECTUAL PROPERTY (IP)

The CIGAs for an Intellectual Property business are the holding, exploiting, or receiving gross income from intangible assets such as copyrights, patents, trademarks, brands and technical know-how; in return for an income in form of a royalty, license fee, franchise fee, capital gain or any other income from the sale or exploitation of an IP asset.

DISTRIBUTION & SERVICE CENTER BUSINESS

The CIGA of a Distribution Center are:

Transportation and storage of raw materials and finished goods, in addition to managing risks associated with this activity.
Managing Inventory.
Taking and processing orders.

The CIGA of a Service Center refers to the provision of consulting and administrative services to related foreign group companies.

SHIPPING BUSINESS

A shipping business would be considered engaged in the following related CIGA only if it operates the ships

Managing Crew including the recruitment, training, and on-going management of the crew.
Overhauling and maintenance of the ship.
Management, oversight and tracking of transportation logistics.
Utilizing, scheduling, and managing the operational logistics of the ship.

The income derived could be in the form of revenues from sale of a good or service, royalties, interest, premiums, dividends and any other amounts generated from performing the above relevant activities in the UAE.

Corporate entities that are owned by the UAE government are excluded from the Regulations. UAE sovereign investment funds and any other UAE government related companies would not need to meet UAE economic substance requirements. Furthermore, a company is not obliged to meet and pass the economic substance test if it does not make income in relation to a relevant activity it carries.

WHAT ARE THE REGULATION REQUIREMENTS?

UAE onshore and free zone entities will need to meet and satisfy they have effective economic substance in the UAE, by passing the test in relation to the relevant business and activities. A company meets the economic test if it:

Conducts “core income-generating activities” in the UAE.
Is directed and managed in the UAE.
Has an adequate number of full-time employees, expenses and physical assets for carrying out the business activity, in the UAE.

WHAT IS THE PROCESS FOR THE REPORTING REQUIREMENTS?

The relevant licensee has an obligation to annually prepare and submit the Economic Substance Report (Report) to the Regulatory Authority (to be determined by the Cabinet of Ministers’ resolution). The Report is to evidence that the licensee/entity satisfies the requirements and include information on the licensee’s relevant activities such as:

Nature and amount of revenue.
Expenses.
Place of business.
Number of full-time employees with qualifications.
Declaration on satisfaction of economic substance requirements.

WHAT HAPPENS IF A COMPANY DOES NOT COMPLY WITH THE REGULATIONS?

It is essential that all relevant entities comply with the Regulations.

New entities – must comply with the Regulations once they receive the trade license, with the first return due in 2020 (or later).
Existing entities – must comply with Regulations from 30 April 2019, with the first return due in 2020.

Failure to comply may result in:

Money Penalties – many businesses have already failed to meet the economic substance test and failed to demonstrate sufficient economic substance in their first reporting period and could be subject to a penalty of AED 50,000.

The fines increase to AED 400,000 for the subsequent fiscal year. Licensees with a year ended 31 December 2022 only have until 31 December 2023 to ensure that they meet the economic substance test. Additional penalties may apply for not providing relevant information, suspending, revoking or not renewing the UAE relevant entity’s trade license. Further, penalties of AED 50,000 will be imposed in case of not providing information or for inaccurate information.

Foreign Authority Disclosure – should the economic substance report indicate non-compliance with the Regulations, the UAE Ministry of Finance will disclose information of the licensee/entity to the foreign authorities in the country of the parent company and the country of residence of the ultimate beneficial owner.

WHO IS EXEMPT FROM ESR?

Exemptions include:

Tax Residents Outside the UAE: Entities that are tax residents in another jurisdiction.
Investment Funds: Investment funds and their underlying SPVs.
Wholly UAE Resident-Owned Businesses: Businesses owned entirely by UAE residents and operating solely within the UAE.
Branches of Foreign Entities: Branches that are taxed on all Relevant Income in their home jurisdiction.
The licenses that they are not carrying relevant activities.

WHAT IF A COMPANY OUTSOURCES TO THIRD-PARTY SERVICE PROVIDERS?

A company that outsources some of its activity to a third-party service provider must comply with the Regulations. Such third-party service providers must within their own right have sufficient presence in the UAE and be able to demonstrate it has enough supervision of the outsourced activities.

WHAT ARE THE RISKS RELATED TO ESR SERVICES IN THE UAE?

Through careful planning and professional advice, the minimal risks connected to Taxes in the UAE can be reduced. You can handle the Tax legislations and procedures easily with the assistance of professional consultants, ensuring adherence to legislations and reducing potential risks.

For an expert consultation, contact Creation Business Consultants via email [email protected] or call +971 4 878 6240 today.

ESR SERVICES FAQs

Who are the Regulatory Authorities for ESR in the UAE?

Compliance with ESR is overseen by various regulatory authorities across the UAE:

Federal Entities: Ministry of Economy, Central Bank of the UAE, Insurance Sector of the Central Bank, and Securities and Commodities Authority.
Free Zones: Different free zones have their own authorities, such as Abu Dhabi Global Market, Dubai International Financial Centre, and Jebel Ali Free Zone Authority, responsible for enforcing ESR compliance within their jurisdictions.

What is a Licensee?

A Licensee is any juridical person or unincorporated partnership registered in the UAE that conducts Relevant Activities. This includes:

Limited liability companies
Private and public shareholding companies
Joint venture companies
Partnerships (limited liability, limited, general) Exclusions: Natural persons, sole proprietorships, and certain trusts and foundations, unless they undertake Relevant Activities.

Do ESR apply to UAE entities that are part of a foreign multinational group?

Yes, ESR apply to any UAE entity conducting Relevant Activities, regardless of its affiliation with a foreign multinational group. However, Distribution, Service Center, Headquarter, or High-Risk IP Businesses are only subject to ESR if they engage in transactions with foreign group companies.

Does a Licensee need to comply if it undertakes Relevant Activities but earns no income?

Yes, Licensees must file a Notification even if they earn no income. However, they are not required to meet the Economic Substance Test or file an Economic Substance Report if no income is generated.

Are offshore free zone companies subject to ESR?

Yes, offshore free zone companies are subject to ESR if they conduct Relevant Activities. They must comply with the regulations despite their offshore status.

If the Ultimate Beneficial Owner is a UAE national or resident, does the company still need to file?

Yes, the nationality or residency of the Ultimate Beneficial Owner does not exempt a company from ESR compliance. All companies undertaking Relevant Activities must file the necessary Notifications and reports.

How are Relevant Activities determined?

Relevant Activities are determined based on the actual economic activities conducted during a financial period, not just what is stated on the commercial license. The assessment focuses on the substance of activities, including operational, financial, and management aspects.

When should a Licensee assess its Relevant Activities?

Licensees should assess their Relevant Activities at the end of each financial period, reviewing all activities performed during the period to ensure compliance with ESR requirements.

What are the reporting requirements for businesses under ESR?

Businesses must:

File a Notification: Within six months from the end of the financial period to declare whether they undertake Relevant Activities.
Submit an Economic Substance Report: If engaging in Relevant Activities, file within twelve months from the end of the financial period.

Can economic substance be shared among group companies?

No, each Licensee must individually meet the economic substance requirements. Although group companies can coordinate on certain aspects, compliance must be demonstrated individually by each entity.

What steps should a new business take to comply with ESR?

New businesses should:

Assess Activities: Determine if their activities fall under Relevant Activities.
Maintain Records: Keep detailed records of financial and operational activities.
Conduct Board Meetings: Ensure governance with regular board meetings and decision-making in the UAE.
File Reports: Submit Notifications and Economic Substance Reports as required.

What resources are available for understanding ESR compliance?

Resources include:

Guidance Documents: Available on the UAE Ministry of Finance website.
Regulatory Authority Publications: Specific guidelines from free zone authorities.

For tailored advice, contact Creation Business Consultants.

Who should a Licensee contact for ESR-related inquiries?

For expert guidance on ESR compliance, contact Creation Business Consultants at [email protected]. Our specialists can provide assistance and ensure you meet all regulatory requirements.

How frequently should a business review its ESR compliance?

Businesses should review their ESR compliance at the end of each financial period to ensure alignment with ESR requirements and timely submission of reports.

What documentation is required to prove economic substance?

Required documentation includes:

Financial Records: Detailed financial statements and records.
Operational Details: Evidence of business operations and employee presence in the UAE.
Management Evidence: Records of board meetings and decision-making processes.

Are there any specific requirements for the Economic Substance Test?

The Economic Substance Test requires businesses to:

Show Physical Presence: Demonstrate operational facilities and presence in the UAE.
Employ Staff: Have a sufficient number of qualified employees in the UAE.
Conduct Activities: Engage in substantial business activities consistent with the regulations.

Can businesses request a review of their ESR status?

Yes, businesses can request a review from the relevant Regulatory Authorities to address compliance concerns or clarify specific issues.

What are the implications of failing the Economic Substance Test?

Failing the Economic Substance Test can result in:

Fines: Substantial financial penalties for non-compliance.
License Suspension: Risk of temporary or permanent suspension of business licenses.
Operational Restrictions: Administrative sanctions that may affect business operations.

Need expert advice or assistance with ESR compliance? Contact Creation Business Consultants at [email protected] for a personalized consultation.

ESR IN BAHRAIN

WHO WILL NEED TO COMPLY WITH ESR?

The ESR in Bahrain apply to corporations, branches, and partnerships in Bahrain that are engaged in the following core income-generating activity (“CIGA”) relevant activities:

Distribution and service centre.
Headquarters.
Holding company.
Leasing.
Shipping.
Intellectual property (IP).
Banks.
Financing companies.
Insurance.
Certain investment firms.
Fund administrators.

WHAT ARE THE REGULATION REQUIREMENTS?

The ESR is monitored and regulated by the Ministry of Industry, Commerce & Tourism (“MoICT”) and the National Bureau for Revenue in Bahrain. Entities conducting any of the above relevant activities are required to meet the ES test & assess the CIGA for each identified relevant activity category, prove they have commercial and managerial operations in the country, register on the International Tax Information Exchange System (“ITES”) portal and submit the economic substance return.

An entity in Bahrain will need to demonstrate and satisfy substantial economic substance by passing the test in relation to the relevant business and activities. A company meets the economic test if it:

Conducts relevant “CIGA” in Bahrain.
Has an adequate number of qualified full-time employees, physical offices, and operating expenses.
The management are present in Bahrain; and have an adequate number of Board of Directors Meetings, certain number of the board are physically present in the country during the meeting, strategic decisions are made at the board meetings and recorded in the minutes of meetings kept in Bahrain; moreover, the board of directors must possess the appropriate knowledge.

WHAT HAPPENS IF A COMPANY DOES NOT COMPLY WITH THE REGULATIONS?

Non-compliant entities with the regulations could be subject to one or more of the following actions:

A warning notice.
Suspension of Commercial Registration (“CR”).
Criminal prosecution.
Money penalty up to BD 1,000 per day.
Striking off the trader from the CR.

ESR IN QATAR

WHO WILL NEED TO COMPLY WITH ESR?

On 17 October 2021, the Ministry of Finance issued Decision No. 20 of 2021 concerning ESR in Qatar which requires entities carrying relevant activities to demonstrate economic substance in Qatar as of 4 November 2021.

The following are considered relevant activities under the Regulations:

Headquartered Businesses.
Distribution and service centers.
Financing and leasing.
Fund management.
Banking activities.
Insurance activities.
Shipping.
Holding company.
Technical consulting.
Technical training.
Intellectual property activities.

WHAT ARE THE REGULATION REQUIREMENTS?

Entities in Qatar need to meet and satisfy substantial economic substance by passing the test in relation to the relevant business and activities. A company meets the economic test if it:

Conducts relevant “core income-generating activity (CIGA)”.
Have an adequate number of qualified full-time employees and operating expenses.
Fulfil any other requirements specified by the licensing authorities.

WHAT ARE THE REPORTING REQUIREMENTS?

The relevant licensee has an obligation to annually prepare and submit the Economic Substance Report to the Regulatory Authority providing the following information:

Place of business.
Nature and amount of revenue.
The annual investment volume in fixed assets.
Number of full-time employees with qualifications and amount of their salary.
Operating expenditure.
Declaration on the satisfaction of economic substance requirements.

WHAT HAPPENS IF A COMPANY DOES NOT COMPLY WITH THE REGULATIONS?

Penalties related to violations for ESR non-compliance and filing requirements will be determined by the authorities in due course.

NEXT STEPS & WHAT CREATION BUSINESS CONSULTANTS CAN DO TO HELP

It is vital that your business understands the economic substance requirements and the obligation to annually prepare the Report and file it with the Relevant Authority.

Creation Business Consultants can help you get a clear understanding of the requirements that could potentially apply to your Company. Creation provides a full range of services including company secretarial services and other outsourced services and packages bespoke for all entities. It is important that you look at key areas of your operation that the Regulations may impact concerning corporate structuring and tax aspects and to ensure to comply with the Regulatory standards. Please feel free to contact our corporate services team at [email protected] or +971 4 871 4142 should you require a quotation for a corporate structure assessment report and assistance.