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Economic Substance Regulations (ESR) are rules that make sure certain businesses in the UAE show they are genuinely operating there. The UAE introduced these rules in 2019 to fight against tax avoidance and make business activities more transparent. This means companies must prove they are presently working and making a real economic contribution in the UAE, not just shifting profits to avoid taxes.
Economic Substance Regulations (ESR) in UAE require all businesses in free zones, onshore, and some other areas to show they are doing real business in the country. These rules only apply to businesses that do certain ‘Relevant Activities’ as listed in the Cabinet of Ministers Resolution No. 57 of 2020. If a business does any of these activities, it must follow the ESR rules. These relevant activities include::
If a company does any of these activities, it must follow the ESR rules. This means showing that the company has real operations in the UAE, such as having employees, spending money, and owning physical assets in the country. The goal is to make sure companies are not just set up in the UAE to avoid taxes but are actually doing real business there.
Reporting Obligations: Businesses must submit annual notifications with preliminary information about their activities. This helps the authorities keep track of companies' compliance with ESR.
Deadline for ESR Filing: Companies must submit their Economic Substance Reports within 12 months of the end of their financial year. For example, if a company’s financial year ends on December 31, 2023, they must file their ESR by December 31, 2024.
Article No. 3 of Resolution No. 57 also explains the Core Income Generating Activities (CIGAs) for businesses doing these relevant activities. CIGAs are the main activities that generate income for the business. Here are the CIGAs for each relevant activity:
Any company that is an exempted licensee or has not earned any income throughout the year from its activities does not need to file and report ESR at the end of the year.
Not following the rules can cause serious problems for companies. They might have to pay fines starting from AED 20,000. Failing to comply can negatively impact a company's business standing and reputation, it will lead to losing trust from clients and partners. If a company keeps breaking the rules, which could result in being removed from the business register. which means it can't legally operate anymore. It's really important to follow these rules so that the company stays respected and can keep doing business in the UAE.
Choosing Reyson Badger to manage your Economic Substance Regulations (ESR) requirements in UAE is an excellent choice since we simplify the process for you. We are specialists in navigating the intricacies of ESR compliance, ensuring that your company satisfies all of the relevant standards with ease. With Reyson Badger, you can count on our deep understanding of UAE economic laws and our commitment to developing solutions that meet your specific needs. Allow us to simplify compliance so you can focus on growing your business.