ESR Filing Criteria in UAE

The Economic Substance Regulations (ESR) in the UAE were introduced to ensure that businesses operating in the country demonstrate substantial economic activity and are not merely set up for tax benefits. Under these regulations, all UAE entities engaged in specified "Relevant Activities" must comply with strict reporting requirements to prove their economic presence. ESR filing involves submitting an annual notification and an economic substance report, which include details about the company's income, activities, and expenditures in the UAE. This framework is designed to enhance transparency, stop tax evasion,, and align with international tax standards, encouraging the UAE to have a just and stable economic environment

Purpose of ESR in UAE

The purpose of Economic Substance Regulations (ESR) in the UAE is to ensure that companies operating within the authority engage in genuine economic activities, thereby enhancing transparency and fairness in the global tax landscape. These regulations align the UAE with international standards set by organizations like the OECD and the EU, aiming to battle harmful tax practices and prevent base breakdown and profit shifting (BEPS). By requiring entities to demonstrate substantial economic presence, ESR promotes economic sustainability, attracts foreign investment, and promotes long-term growth while upholding the UAE's reputation as a reputable business hub. Compliance with ESR is essential to avoid penalties and maintain regulatory compliance, contributing to the integrity of the UAE's business environment.

Who needs to submit ESR in UAE?

An Economic Substance Report must be filed by corporate entities (such as Limited Liability Companies, Public Joint Stock Companies, Private Joint Stock Companies, etc.) or partnerships (like Limited Liability Partnerships, General Partnerships, etc.) that are not classified as Exempted Licensees. These entities must also derive Relevant Income from any of the specified Relevant Activities during a Reportable Period.

The Relevant Activities that require submission of an Economic Substance Report include:

• Banking Businesses
• Insurance Businesses
• Investment Fund Management Businesses
• Lease-Finance Businesses
• Headquartered Businesses
• Shipping Businesses
• Holding Company Businesses
• Intellectual Property Businesses
• Distribution and Service Centre Businesses

For a comprehensive understanding of each Relevant Activity, entities are directed to consult the Relevant Activities Guide provided in Schedule 1 of Ministerial Decision 100 of 2020 issued by the Ministry of Finance. This guide offers further clarification and details regarding the scope and nature of each activity.

Entities engaged in any of these specified Relevant Activities are required to prepare and submit an Economic Substance Report, providing detailed information on their operations, income, expenditure, assets, employees, and governance related to the relevant activities conducted within the UAE. Compliance with these reporting requirements is crucial to ensure adherence to Economic Substance Regulations and avoid potential penalties.

ESR Report Filing Requirements

Here's a breakdown of the ESR Report Filing requirements based on different scenarios:

• Multiple Licensee: Each Licensee must file the Economic Substance Report independently, regardless of whether they are part of a consolidated group for financial reporting or VAT purposes.
• UAE Corporate Entity with UAE Branches: A UAE Corporate Entity with one or more UAE branches must report their Relevant Activities and those of their UAE branches in a single composite ESR Report.
• Foreign Entities with UAE Branches: Foreign entities with UAE branches reporting to the foreign parent organization are not required to submit an ESR Report.
• UAE Entity with Foreign Branches: A UAE Entity conducting Relevant Activities through its foreign branch or permanent establishment, subject to tax in the foreign jurisdiction, is not required to submit an Economic Substance Report for the foreign branch.
• Licensee in Liquidation: A Licensee undergoing liquidation, even if it continues to conduct Relevant Activities during the liquidation period, must fulfill the filing requirements for ESR Notification and Economic Substance Report (if applicable) for the period up to the liquidation date.

These guidelines aim to ensure that entities comply with the Economic Substance Regulations (ESR) in the UAE, providing clarity on reporting obligations based on their organizational structure, activities, and status. Compliance with these requirements is essential to avoid penalties and maintain regulatory compliance.

When must Companies file an ESR Report?

Businesses in the UAE are required to submit an Economic Substance Report (ESR) annually for every financial year in which they engage in a "relevant activity." The key requirements are:

•  Annual Submission 

An ESR report must be submitted for each financial year during which a business performs a relevant activity.

• 12-Month Deadline

The report must be submitted within 12 months from the end of the relevant financial year.For instance, an organization's ESR report must be submitted by December 31 of the following year if its fiscal year ends on that day.

• FTA Online Portal

The report must be submitted through the Federal Tax Authority (FTA) online portal designed for ESR notifications and reports.

This reporting ensures compliance with the UAE’s Economic Substance Regulations, aimed at preventing harmful tax practices.

What details must be included in the ESR Report?

The Economic Substance Report (ESR) template requires comprehensive details about a business's operations to comply with regulatory standards. The report is structured into several sections, each requiring specific information:

General Information:

• Licensee name
• License number
• Name of the licensing authority
• Name of the regulatory authority
• Permanent place of establishment
• City and country of the office
• Complete address of the office
• Legal forms and premises
• Answers to:
• Is the business registered for Value Added Tax (VAT) in the UAE?
• Is the entity part of a multinational group?
• Is the entity completely owned by the UAE government

Branch Details (if applicable):

• License number and name of the licensing authority for each branch.

Reportable/Financial Period:

• Start and end date of the financial year being reported (must be a completed financial year).

Updated Information:

• Indicate if there are changes from the previously submitted notification form and provide reasons for any changes.

Financial Information:

• Total revenue for the financial year
• Accounting profits or losses
• Net value of UAE assets
• Answers to: 
• Are audited financial statements available for the reportable financial year?
• Is the currency used in the financial statements AED or USD?

Relevant Activity Information:

• Select relevant activities executed during the financial year
• Mention relevant authorities for these activities
• Answers to:
• Is the business a high-risk intellectual property business?
• Has the business hired any outsourced service providers for any of the relevant activities?
• Provide detailed information about each selected relevant activity.

Ownership Information:

• Name, tax identification number, complete address, and tax residence country of the parent company, ultimate parent company, and ultimate beneficial owner.
• Similar information for any outsourcing providers used.

Management in the UAE:

• Details on business management in the UAE, including:
• Board meetings held inside or outside the UAE
• Decisions made in these meetings
• Minutes of the meetings

Declarations:

• Confirmations that the business has:
• Adequate physical assets
• Adequate expenditure
• Adequate number of qualified employees
• Additional documents, including mandatory financial statements, can also be attached.

Form Review:

• Preview the completed form for accuracy before submitting.

Consulting with a UAE ESR consultant is recommended to ensure compliance with the Federal Tax Authority’s regulations and standards

Reyson Badger - ESR Consultants

Businesses can greatly benefit from expert guidance in managing the complex regulations of the Economic Substance Regulations (ESR) in the United Arab Emirates. Reyson Badger offers comprehensive ESR filing services to ensure your compliance with these regulations. Our team of experts provides tailored solutions to meet your specific needs, from assessing your entity's activities to preparing and submitting the required reports accurately and on time. With a deep understanding of the local regulatory environment, we help you avoid penalties and maintain good standing with the authorities. Trust Reyson Badger to streamline your ESR filing process, allowing you to focus on your core business activities.