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Econmic Substance Reporting (ESR)
Economic Substance Regulation (ESR) in Dubai is another set of compliance requirements to be followed by all business entities. The Economic Substance Regulations in UAE is in agreement with the global standard set by the Organization for Economic Co-operation and Development (OECD) on Harmful Tax Practices with an objective to curb harmful tax competition, on December 1, 1997, the European Union (EU) adopted a resolution on the code of conduct of business taxation.
JAS Accountants assists companies in determining the impact of Economic Substance Regulation on client’s business, providing professional support and expert advice regarding all aspects of ESR in Dubai, Abu Dhabi, Sharjah, UAE.
The Economic Substance Regulations (ESR) brings the specific requirements for businesses to demonstrate that their actual economic activity is in UAE and it is not driven solely to benefit from alow or non-tax jurisdiction. Thus, preventing the harmful tax practice of profit shifting from high-tax jurisdiction to low tax regimes.
On 10th August 2020, UAE introduced New Economic Substance Regulation via Cabinet of Ministerial Resolution no 57 of 2020 concerning Economic Substance Requirements (hereafter: ”the Amended Regulations”) along with the Ministerial Decision no 100 of 2020 which repealed and revoked the earlier associated laws, the entities will now have to comply with the Amended Regulations.
What is the scope of the Amended Regulations?
The Amended Regulations apply to a juridical person (incorporated inside or outside of UAE) or an unincorporated partnership registered in the State, including a Free Zone and a Financial Free Zone that carries on a Relevant Activity (hereafter: “Licensee”) listed below.:
- Banking business
- Insurance business
- Investment fund management business
- Lease-Finance business
- Shipping business
- Holding company business
- Intellectual property business
- Headquarter business
- Distribution and service centre business
What is substance requirement under the Amended Regulations?
A Licensee operating any of the Relevant Activity shall have economic substance in the UAE only if it fulfils the following economic substance requirements for each of its Relevant Activity in UAE.
- Conduct the relevant “core-income generating activity” in UAE
- Be “directed and managed” in UAE
- Have adequate number of qualified employees, incur adequate expenditure proportionate to the level of activity from an adequate physical presence in the UAE
The Amended Regulations allows a company to outsource some or all of its activity to third-party service providers; however, these service providers must in their own right have adequate presence in the UAE and the company must be able to demonstrate that it has full control and is able to monitor and adequately supervise the outsourced activities.
Further, a UAE entity that only undertakes a “Holding Company Business” will be subject to less stringent economic substance requirements, whereas there are additional requirements apply if a Relevant Entity carries out “High Risk IP Business”.
What are the penalties for not complying with the ESR in Dubai?
Failure to comply would result in following administrative penalties:
- Failure to file notification – AED 20,000
- Providing inaccurate information - AED 50,000
- Failure to submit substance report - AED 50,000
- Failure to fulfil economic substance test – AED 50,000
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Office 17, 18th floor, One by Omniyat
Business Bay
Dubai, UAE
Telephone: +971 4393 8252
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