Economic Substance Regulations (ESR) Consultancy

Accounting and Tax Services

Economic Substance Regulations (ESR)

The United Arab Emirates (UAE) implemented Economic Substance Regulations as part of its commitment to the OECD Inclusive Framework and in response to an EU assessment. These regulations aim to prevent harmful tax practices and discourage low-tax jurisdictions from attracting profits for mobile activities without genuine economic substance.

The UAE's Economic Substance Regulations target companies (onshore, free zone, and specific others) engaged in designated activities. These regulations require companies to demonstrate a sufficient "economic presence" within the UAE, proportional to their activities. This ensures UAE entities report profits accurately, reflecting the actual economic activity they conduct in the country.

Who Needs to Comply with ESR in the UAE?

The Economic Substance Regulations (ESR) apply to licensees—companies, partnerships, and other business forms—registered in the UAE, including free zones and financial free zones. These regulations target businesses that carry on any activity deemed “relevant” under the ESR framework.

Here’s a crucial point: determining ESR applicability requires a “substance over form” approach for UAE businesses. This means looking beyond the activities listed on your commercial license and focusing on the actual activities conducted during a financial period.

If you need clarification on whether your business conducts a relevant activity under the ESR, seeking professional guidance is highly recommended.

Understanding Financial and reportable period

Financial Period:
This refers to the timeframe for which a licensee prepares its financial statements (if applicable). Newly established licensees may have a first-year financial period that’s either shorter or longer than usual.

Reportable Period:
This is the specific accounting period, starting on or after January 1st, 2019, for which a notification under the ESR regulations needs to be filed. It ends on the same date as the financial statements (if any) are prepared. Essentially, the reportable period is always the financial period before the one in which the notification is due.

For example,
Licensee with a Gregorian calendar year:

Financial Period: January 1st, 2019–December 31st, 2019
Reportable Period: Same as the Financial Period (January 1st, 2019–December 31st, 2019).
Newly Incorporated Licensee (Short Period):

Incorporation Date: October 1st, 2019
Financial Period: October 1st, 2019–March 31st, 2020 (shorter period)
Reportable Period: Same as the Financial Period (October 1st, 2019–March 31st, 2020)
Newly Incorporated Licensee (Long Period):

Incorporation Date: January 1st, 2019
Financial Period: January 1st, 2019–March 31st, 2020 (longer period)
Reportable Period: This first long period is reported, but subsequent notifications will cover the following year (April 1st, 2020–March 31st, 2021).
Licensee Incorporated Before January 1st, 2019:

If your company were incorporated before January 1st, 2019, with a financial year ending before that date, you wouldn’t need to submit a notification for that period.
Your first reportable period would be the following year (e.g., July 1st, 2019–June 30th, 2020).

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ESR Compliance Frequency

Licensees need to assess their ESR obligations annually. This means you need to determine if you fall under the regulations every year. You are solely responsible for submitting the necessary forms through the Economic Substance Portal. Filing Deadlines! Notification: If your business conducts a relevant activity, you must file an annual notification within six months from the end of your financial period. Economic Substance Report: If you earn income from your relevant activity(ies), you are also required to submit an Economic Substance Report within 12 months from the end of your pertinent financial period. Seeking professional help According to Ministerial Decision No. 100 of 2020 regarding the issuance of directives for implementing the provisions of Cabinet Decision No. 57 of 2020 concerning economic substance requirements, if a business cannot ascertain whether it engages in a relevant activity, it is advisable to seek professional guidance.

Jumeira: Your Partner in UAE Economic Substance Regulation

Jumeira Consultants helps businesses navigate the complexities of ESR compliance in the UAE. Here’s what we can offer:
  • ESR Status Review: We assess your business activities to determine if they fall under the ESR framework.
  • Notification Filing: We handle the preparation and submission of your ESR notification to the Ministry of Finance.
  • Comprehensive Advisory Services: Our experts provide tailored advice on building economic substance, testing your activities against ESR requirements, and preparing necessary documentation. We can also conduct gap analyses to identify areas for improvement.
  • ESR Reporting Made Easy: We assist in preparing and submitting your annual ESR report to the Ministry of Finance.
  • Penalty Appeal Support: If you face any penalties, we can help you review the case and prepare an appeal for reconsideration.

Jumeira Consultants: Your Trusted Partner!

For any related assistance or queries, call our experts at +971 52 809 8408 or email info@jumeiraconsultants.com to schedule a meeting.

FAQ

The ESR are regulations in the UAE that ensure companies operating there have a real economic presence. This helps prevent tax avoidance by discouraging companies from simply channeling profits through the UAE without any real activity.

It depends on your activities. Any UAE-registered business (including free zones) that conducts activities like banking, insurance, or investment management might be subject to ESR.  The key is the actual work you do, not just what your license says. If you’re unsure, consider seeking professional guidance.

There are two main filings:

* Notification (within 6 months of your financial year end): This informs the authorities if you conduct a relevant activity.

* Economic Substance Report (within 12 months of your financial year end): This report details how you meet the ESR requirements, but only if you have income from relevant activities.

Financial period: This is your usual accounting timeframe (e.g., a calendar year).

Reportable period: This is specific to ESR and aligns with your financial period. It’s the timeframe for which you submit ESR filings.

The document provides examples to clarify this concept.

The document recommends seeking professional guidance, especially if you’re unsure about your ESR applicability or how to meet the requirements.