UAE Economic Substance Regulations (ESR)

The UAE has been proactive in its commitment to maintaining a transparent and fair tax environment. As part of this commitment, the Economic Substance Regulations (ESR) were introduced to ensure that entities engaging in relevant activities maintain substantial operations within the UAE. This article delves into the latest ESR rules, outlining compliance requirements and how Prism 7 Corporate Services can assist businesses in navigating these regulations. Although the last amendments were now a while ago, we thought it still worth mentioning ESR for new businesses that may not be aware of the requirements.

Overview of Economic Substance Regulations (ESR)

Economic Substance Regulations (ESR) were initially introduced in the UAE through Cabinet Decision No. 31 of 2019, effective from January 1, 2019. The primary objective was to align with the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and to address concerns from the European Union regarding harmful tax practices. Subsequent amendments were made via Cabinet Decision No. 57 of 2020 and Ministerial Decision No. 100 of 2020, which came into effect on August 10, 2020, and August 19, 2020, respectively.

Key Amendments in UAE ESR Regulations

The most recent amendments have introduced significant changes to the compliance landscape for businesses operating in the UAE. Notably:

• Expanded Definition of Qualifying Income: Includes income from qualifying intellectual property and sets out conditions for qualifying and excluded activities.
• De Minimis Requirement: Specifies that non-qualifying income should not exceed 5% of total revenue or AED 5 million.
• Mandatory Filing Deadlines: Businesses must submit an Economic Substance Notification within six months of the end of their fiscal year and an Economic Substance Report within twelve months if they have earned income from relevant activities during that period​.

Relevant Activities under ESR

Entities must conduct an Economic Substance Test if they are involved in any of the following activities:

• Banking
• Insurance
• Investment Fund Management
• Lease-Finance
• Headquarters
• Shipping
• Holding Company
• Intellectual Property
• Distribution and Service Centers

ESR Compliance Requirements

• Economic Substance Notification: Required annually to declare if the business is conducting relevant activities, even if no income was generated from such activities.
• Economic Substance Report: A detailed report demonstrating substantial activities in the UAE, to be submitted if income was earned from relevant activities.

Penalties for ESR Non-Compliance

Failure to comply with ESR can result in substantial penalties:

• Up to AED 20,000 for failing to submit a notification.
• Up to AED 50,000 for failing to submit a report or for providing inaccurate information.
• Up to AED 50,000 for the first instance of failing the Economic Substance Test, increasing to AED 400,000 for subsequent failures

How Prism 7 Can Assist With ESR

Prism 7 Corporate Services offers comprehensive support to ensure your business meets all ESR requirements. Our services include:

• Impact Assessment: Evaluating how ESR regulations affect your business operations.
• Gap and Remediation Analysis: Identifying compliance gaps and recommending corrective actions.
• Compliance and Reporting: Assisting with accurate and timely filing of Economic Substance Notifications and Reports, ensuring all regulatory requirements are met.

Staying compliant with the UAE's Economic Substance Regulations is crucial for avoiding penalties and maintaining business operations. Prism 7 Corporate Services is equipped to guide you through every step of the compliance process, ensuring your business meets all regulatory requirements.