Economic Substance Regulation, or ESR, is a hot topic on everyone’s mind. It came into existence after the UAE Economic Substance Law of 2018 was enforced by the UAE government. Many people are still unaware of what Economic Substance is and how it proves beneficial for both business owners and the economy of the UAE.

Thankfully, with our guide, you can easily file for Economic Substance Regulation in the UAE. There are thousands of businesses affected by this change, so we wanted to simplify the process for each of them.

It had become quite common for companies in the United Arab Emirates (UAE) to operate from anywhere and everywhere worldwide to register themselves in various jurisdictions with zero economic presence in UAE. They generally did this to avoid paying any taxes in UAE. However, Economic Substance Regulation in the UAE has changed this whole game by requiring businesses to make their presence felt and also have a certain level of economic substance, among the other aspects. This article will explain everything you need to know about ESR and its application to your business.

What is ESR Notification

UAE introduces global compliance that free zone, offshore companies, and the mainland have to provide Economic Substance in listed activities conducted in the UAE.

For ESR’s first part, it is required to file an Economic Substance notification to the respected regulatory body of the UAE within the demanded period.

Why Implement ESR in the UAE?

• Introduction of Value Added Tax
• Introduction of AML compliance

Who need it?

Companies either mainland, offshore, free zone, or the economic zone, conducting related activities and earning, need to file ESR in UAE.

These associated activities are mentioned below:

• Banking business
• Intellectual property business
• Shipping business
• Insurance business
• Holding company business
• Distribution and service center business
• Headquarter business
• Lease-finance business
• Investment Fund management business

It is essential to consider that merged company groups and multiple accounting companies may not file a single notification. Each company is required to file separate applications. We believe consolidated one’s invalid. So, to avoid such a problem, consulting a top auditing firm in Dubai is highly needed, delivering experience in providing ESR services.

Latest Development in ESR Filing

It has introduced a new exemption category by introducing Resolution 57/2020. You need to file an ESR notification coupled with documentary evidence to show the position; here, you will get the exempt status of ESR.

Also, UAE FTA is the authority to lead the charge as a regulatory authority of each licensee; for:

• Evaluation of completing Economic Substance Test by licensees
• Penalizing for non-compliance
• Hearing and delivering decisions on filed appeals of licensees.

Penalties of Failing ESR Compliance

• If you fail to comply with the ESR test, you will face a penalty of AED 10,000 to AED 50,000.
• Moreover, subsequent failure results will cause a penalty of AED 50,000 to AED 300,000.

Step by Step Guide of How to File ESR

Assessment of Eligibility

Firstly, the company must ensure that they fall under the associated activities. The company can get confirmation or updated information through the UAE Ministry of Finance website. You have to file notification within six months from the culmination of the associated financial activity period only if you are a licensee and exempted licensee.

Test Assessment

Afterward, the company has to ensure that they fall within the standard of the Economic Substance Test. Hence, the company can find the template notification and ESR report on the website of the Ministry of Finance before filing for the information. If the company is perplexed to take action, as the result, it can get complete guidance from the MoF website. Further, it can get direction from the authentic ESR filling companies.

Filing

The ending part of the ESR process is to file the notification to a competent authority in the UAE. According to MoF website information, the filing portal has been live since Dec 2020. You can file notices and an Economic Substance Report too for which the company needs to keep annual substance return proofs.

In case the company does not fall under these rules and needs to show the required substance in the UAE. In that case, we assess to verify that the company can satisfy economic sense according to compliance.

Reporting

In the end, companies have to finalize and submit the ESR report to the regulatory authority yearly. In case, the authority demands proof, you must have all of the below documents ready.

Economic Substance Test

Licensees are required to comply with the economic substance test. In this regard, they must be able to show below:

• Firstly, a sufficient level of qualified and experienced employees and adequate physical presence in the UAE;
• Secondly, acceptable expenditure on income-generating activities; and
• Thirdly, the economic substance of relevant activities is in the UAE.

Licensees must, at all times, comply with the following requirements:

• Firstly, the licensee shall carry on a relevant activity directed and managed from the UAE;
• Secondly, the licensee shall carry out core income-generating activities (CIGA) about a relevant training from the UAE;
• Moreover, you must comply with an adequate level of appropriate expenditure, qualified employees, and physical assets in the UAE for conducting CIGAs; and
• Above all, adequate premises are available for carrying on CIGAs.

Is it Applicable to?

The economic substance test is applicable to all businesses operating in UAE under the below licenses:

• Investment fund manager license
• Headquarter license
• Holding company license
• Lease finance license
• Shipping license
• Intellectual Property License

How does AEY Auditing of Accounts Assist?

A company may face many issues during the overall process of ESR filing. It is because of its complication. They publish all the information regarding the notice of ESR and its deadlines on the MoF website.

We must consult such companies with the expert and reputed ESR filing companies in UAE for significant help.

A E Y Auditing of Accounts is a top audit firm in UAE regarding Economic Substance Regulation (ESR) compliance, reporting, and filing. We are in your services to help with ESR. Our professionals significantly evaluate your business activities under new compliances. Also, we deliver the best support throughout navigating the ever-changing UAE regulatory landscape.