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Economic Substance Regulations (ESR) UAE Guide 2022
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The Economic Substance Regulations (ESR) require UAE onshore and free zone companies and certain other business forms that carry out certain activities to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake. The…
The Economic Substance Regulations (ESR) require UAE onshore and free zone companies and certain other business forms that carry out certain activities to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake. The purpose of the Regulations is to ensure that UAE entities report actual profits that are commensurate with the economic activity undertaken within the UAE. Here are some frequently asked questions about the Economic Substance Regulations (ESR) to guide and help you better understand it.
FREQUENTLY ASKED QUESTIONS
1. Who needs to file an Economic Substance Report and when?
Only licensees that earn income from a relevant activity during the relevant financial period and that are not exempt from the Regulations are required to demonstrate economic substance in the UAE and file an Economic Substance Report. Economic Substance Reports must be filed within 12 months from the end of the relevant financial period.
2. How to know if you are a licensee?
A licensee is a juridical person or an unincorporated partnership that is registered in the UAE and that undertakes a relevant activity and can be a:
• limited liability companies
• private shareholding companies
• public shareholding companies
• joint venture companies
• partnership (e.g., a limited liability partnership, a limited partnership, a general partnership, etc.)
3. What are the relevant activities that are subject to ESR?
The Regulations apply to Licensees that carry out any of the following Relevant Activities.
• Banking Businesses
• Insurance Businesses
• Investment Fund Management Businesses
• Lease-Finance Businesses
• Headquarter Businesses
• Shipping Businesses
• Holding Company Businesses
• Intellectual Property Businesses
• Distribution and Service center Businesses
4. How to determine the financial period for Economic substance purposes?
A Licensee’s financial period should correspond to the period for which financial statements (if any) are prepared to. Newly incorporated Licensees may have either a short or long first financial period.
5. Is there a deadline for filing an ESR Notification?
Yes, The Notification must be filed within six months from the Licensee’s financial year-end.
For example:
| Financial Year End | Deadline |
| 31 Mar | 30 Sept |
| 30 Jun | 31 Dec |
6. How should the Notification be filed?
The Notification must be submitted electronically on the Ministry of Finance ESR portal.
7. What happens if you do not submit a Notification?
Non-compliance with the obligation to file a Notification before the deadline is subject to a penalty of AED 20,000.
8. What happens if the information provided in the Notification is incorrect?
Providing incorrect or false information in the Notification is subject to a penalty of AED 50,000.
9. Are offshore or free zone companies subject to the ESR?
Yes, if the ‘offshore’ company undertakes Relevant Activities as listed above. (See no. 3)
10. When should I assess whether my company undertakes a Relevant Activity?
The assessment needs to be done for each financial period and should consider the activities undertaken by the Licensee at any time throughout the relevant financial period.
11. Is there any exemption on filing an ESR?
Yes, the following Exempted Licensees from filing an Economic Substance Report, and the requirement to demonstrate substance in the UAE are:
• Licensee that is a tax resident outside the UAE.
• An investment fund and its underlying SPVs / investment holding entities.
• A wholly UAE resident-owned business that is not part of a multinational group and that only carries on business in the UAE.
• A branch of a foreign entity that is subject to tax on all its Relevant Income in a foreign jurisdiction.
Please note Sufficient evidence must be submitted along with the Notification form to claim any of the above exemptions.
12. I currently do not undertake a Relevant Activity, but this may change in 6 or 10 months’ time. Am I required to file a Notification now?
No, you should wait until the end of your financial period and then assess if you carried out a Relevant Activity.
13. Is there a minimum level of income that must be met for the Economic Substance Regulations to apply?
No, there is no minimum income requirement or threshold. If you carry out a Relevant Activity you are required to submit a Notification.
14. What if my business carries multiple relevant activities?
Businesses with more than one Relevant Activity during a financial period should submit a single Notification and Economic Substance Report and report all their Relevant Activities in that single Notification and Economic Substance Report.
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