Economic Substance Regulation (ESR) in UAE

Economic Substance Regulations (ESR) in UAE are designed to ensure that companies engaging in specific business activities demonstrate substantial economic presence in the UAE. Implemented in response to global initiatives against tax avoidance, ESR mandates that UAE-based entities, including those in free zones, undertake defined "Relevant Activities" such as banking, insurance, investment fund management, and shipping, to meet certain substance requirements. These include management and operations conducted in the UAE, adequate expenditure, and physical presence, along with annual reporting obligations to the relevant authorities 

To follow ESR, you need to know if it applies to what your business does. Then, you take steps to make sure you're following the rules. It doesn't matter if your business is big or small; understanding ESR can make a big difference in how well your business runs and stays on the right side of the law. Let's get into the details of ESR, from understanding the basics to finding ways to meet the rules. It will help your business grow while staying legal and competitive.

Purpose of Economic Substance Regulations 

The Economic Substance Regulations (ESR) in the UAE aim to ensure that UAE entities engaged in certain defined activities (Relevant Activities) demonstrate economic substance in the UAE. This involves:

• Conducting core income-generating activities (CIGAs) within the UAE.
• Being directed and managed in the UAE.
• Maintaining adequate employees, physical assets, and expenditure in the UAE.

These regulations are designed to prevent harmful tax practices, align with international standards and ensure that profits are appropriately attributed to the activities carried out within the UAE 

Essential ESR Compliance Requirements for Businesses in the UAE

• Know Your Business: Identify whether your business falls into any of the specific categories listed in the ESR regulations, like banking, insurance, or investment funds.
• Establish a Real Presence: Ensure your business has a genuine presence in the UAE. This means having a physical office, qualified employees, and actually conducting business operations within the country.
• Maintain Detailed Records: Keep an eye on all activities related to your business, which may include financial transactions, contracts, and even employee information.
• Annual Reporting: Send in annual reports to relevant authorities to declare your business activities and level of economic substance.
  Detailed Reports: Prepare detailed reports on your business operations, income, expenses, and how you meet the economic substance requirements if your business falls under ESR.
• Consult Tax and Legal Experts: Talk to tax and legal experts such as Reyson Badger to understand the precise ESR rules that apply for your business and guide your actions accordingly.
• Updates on ESR Rules: Stay up to date on developments in the regulation of ESR to avoid potential non-compliance.

ESR Filing and Notification

The United Arab Emirates (UAE) has a set of rules called Economic Substance Regulations (ESR) to make sure that companies here are truly doing business and not just existing on paper. ESR has two main parts: ESR Filing (reporting) and ESR Notification.

• ESR Reporting or Filing : Refers to the requirement for entities engaged in relevant activities to submit reports demonstrating compliance with the Economic Substance Regulations (ESR). These regulations ensure that companies conducting certain activities within the UAE have substantial economic presence and are not merely established for tax avoidance purposes.
• ESR Notification: It is a formal declaration that entities must submit to confirm whether they engage in any relevant activities covered under the Economic Substance Regulations (ESR). This notification is essential for compliance with UAE's economic substance laws, which are designed to ensure that entities conducting certain types of business within the UAE have a genuine economic presence in the country.

ESR Filing (ESR Reporting)

Submission of ESR Filing

To submit an ESR report electronically through the Ministry of Finance (MoF) portal, follow these steps:

• First, ensure that your business is registered on the MoF portal. If not, you may need to create an account and provide necessary details about your company.
• Log in to your MoF account and navigate to the section specifically for Economic Substance Regulations (ESR).
• Choose the reporting period for which you need to submit the ESR report. This period usually aligns with your financial year.
• Fill out the ESR report form with correct  and detailed information about your business activities. This includes details about the type of business activities conducted in the UAE, revenue generated from these activities, assets used in the activities, and the number of employees involved.
• Attach documents, such as financial statements, contracts, and organizational charts, to validate the information provided in the report.
• Review all the information entered in the form and make sure it's correct. Once you are satisfied, confirm that all details are correct and ready for submission.
• Click on the submit button to send the ESR report electronically through the MoF portal.
• After submission, you should receive a confirmation and acknowledgment of receipt from the MoF portal. Keep this acknowledgment for your records as proof of submission.

Criteria of ESR Reporting

Relevant Activities: Your business needs to do certain types of work like banking, insurance, leasing, managing funds, shipping, providing services from headquarters, managing intellectual property, selling goods, or managing investments.

"Relevant activities" are specific things that businesses do that make them have to follow Economic Substance Regulations (ESR) in the UAE. These activities are decided by the UAE Ministry of Finance (MoF) and include:

• Banking Business: Like when banks take deposits, give loans, or do other money-related stuff.
• Insurance Business: When companies sell insurance or related services.
• Lease and Finance Business: When businesses lease things or provide financing for stuff like equipment.
• Shipping Business: When companies run ships for commercial purposes, manage crews, or move goods by sea.
• Fund Management Business: When companies manage investment funds for others.
• Headquarters Business: When companies provide management or admin services to other parts of their group.
• Intellectual Property Business: When companies deal with things like patents, trademarks, or copyrights.
• Distribution and Service Center Business: When companies sell goods or provide services, either in the UAE or outside it.
• Holding Company Business: When companies own and manage investments or shares in other companies.

Businesses might not have to do ESR filing if they

• If their income is below a certain level set by the MoF.
• If they don't do any of the things listed above during the year.
• Some businesses that are already watched over by other UAE groups might not have to do ESR filing if they meet certain rules set by those groups.
• If they're part of a foreign company that pays taxes in another country and only do the relevant activities outside the UAE.

• Income Threshold: If your business makes a certain amount of money decided by the MoF, you have to report your activities under ESR.
• Core Income-Generating Activities (CIGAs): For each type of work, your business must do important money-making tasks in the UAE related to that work.
• Substance Requirements: Your business needs to show that it has enough presence in the UAE, like having offices, staff, and spending money related to the work it does.
• Following ESR Rules: Make sure your business follows the rules set by the MoF for reporting, including giving correct financial and operational details.
• On-Time Reporting: Submit your ESR report on time as per the deadlines set by the MoF for each reporting period.

By doing these things, your business stays on the right side of the law, avoiding penalties or problems. Keep checking for any new rules or changes from the MoF to stay compliant.

Here is a more detailed overview on ESR Filing Criteria in UAE

ESR Filing Required Documents

Having these documents ready and organized helps your business report its activities correctly and show it's following the rules.

• Financial Statements: These are papers that show how much money your business made, spent, and saved during the time you're reporting on.
• Details of What Your Business Does: This is information about the specific work your business does, like banking, insurance, leasing, managing funds, shipping, dealing with intellectual property, selling goods, or managing investments.
• Employee List: A list of all the people who work for your business and what they do related to the work your business does.
• Information About Where Your Business Works: This includes details about the places your business uses, like offices or buildings, to do its work in the UAE.
• Spending Records: Papers that show how much money your business spent on things like offices, employees, equipment, and other costs related to the work it does.
• Copies of Agreements: These are papers that show any deals or contracts your business has, like renting spaces, getting services, dealing with intellectual property, or distributing goods.
• Diagram of Your Business's Structure: A picture or chart that shows who's in charge and how your business is set up, including any other parts of your business like branches or subsidiaries.
• Proof of Following the Rules: Any extra papers or evidence that shows your business is following the rules set by the UAE Ministry of Finance for reporting and working the right way.

To have a more-detailed overview on ESR Documents Required, check out here.

ESR Reporting for Free Zone Companies

Free zone companies in the UAE follow Economic Substance Regulations (ESR) if they do relevant activities Listed by the UAE Ministry of Finance (MoF). This relevent activities includes things like banking, insurance, leasing, managing funds, shipping, dealing with intellectual property, selling goods, or managing investments.

But, how these rules apply to free zone companies might be a bit different from compared to mainland companies. Some free zones may have their own rules about ESR filing that companies in those zones must follow. These rules might be about how to report, when to submit reports, and what exactly companies need to do to follow the rules.

It's really important for free zone companies to talk to the people in charge of their free zone and legal experts to understand exactly what they need to do for ESR Reporting. This way, they can make sure they're doing everything right according to the rules of their free zone.

ESR Filing for Mainland Companies

Mainland companies in the UAE have to follow Economic Substance Regulations (ESR) if they engage in relevant activities  listed under the UAE Ministry of Finance (MoF). These relevant activities includes things like banking, insurance, leasing, managing funds, shipping, dealing with intellectual property, selling goods, or managing investments.

These companies should check if their activities fall under relevant activities  that require ESR filing. If they do, they need to follow the ESR rules, which means submitting reports on time as per the MoF's guidelines set by the MoF.

It's really important for Mainland companies to keep up-to-date with the ESR rules and get advice from legal or financial consultants to make sure they're following the right rules for their business.

ESR Reporting Deadline

Businesses must submit their ESR report within 12 months after the end of their financial year if they carry out relevant activities. This deadline is mandated to verify that businesses comply with economic substance requirements.Reports should be filed through the Federal Tax Authority (FTA) online portal.

Example:

The exact deadline can change based on the situation of each business and any new rules from the UAE Ministry of Finance (MoF).

ESR Non-Filing Penalty

Not following the rules for Economic Substance Regulations (ESR) in the UAE can lead to big fines and other problems for companies. If a company doesn't send its ESR report on time:

• They can get fined money by the UAE Ministry of Finance (MoF). The amount of the fine depends on how serious the problem is.
• They might face other punishments too, like getting warnings, having certain rights taken away, or facing other official actions.
• Companies could lose special tax benefits or exemptions they get under UAE tax laws if they don't follow the ESR rules.
• Not doing what's needed for ESR can hurt a company's reputation, making it less trusted in the business world.

How to appeal for Non-Filing Penalty

If you get a penalty for not sending the right documents under Economic Substance Regulations (ESR) in the UAE, here's what you can do to appeal it. First, read the penalty notice carefully from the UAE Ministry of Finance (MoF) to know why you got the penalty and when you can appeal. Gather proof like emails, documents you tried to send, and your financial records to show your side. Write a letter to the MoF explaining why you think the penalty is unfair or should be less, and include your proof. Send this letter in time through the right channels, and check to make sure they got it. Then, wait for their decision, which could be keeping, reducing, or canceling the penalty. Follow what they say and any rules they set. It's a good idea to get help from legal experts to guide you through this process.

ESR Notification

How to Notify ESR

To tell the UAE Ministry of Finance (MoF) about Economic Substance Regulations (ESR), you usually do it online through their website. Here's how it works 

• Go to the MoF website.
• If it's your first time, sign up. If you already have an account, log in.
• Find the ESR section on the website.
• Fill in a form with your company's details like name, registration number, and what it does.
• You might need to upload some documents, like charts or financial papers.
• Check everything is correct, then send the form.
• You'll get a confirmation when it's done.
• If you have questions, ask the MoF for help.

Doing this keeps your company following the rules for ESR in the UAE.

Deadline for ESR Notification

Businesses are required to submit their ESR (Economic Substance Regulations) Notification within six months from the end of their financial year. This submission ensures that the relevant activities undertaken by the business are reported in accordance with the regulations.

Example

The ESR Notification is an initial requirement to inform the authorities whether the business conducts any relevant activities and needs to comply with the Economic Substance Test. This notification must be submitted through the appropriate regulatory platform. Just remember that sometimes the deadline might change depending on your situation or if the MoF updates their rules.

Here are the deadlines for ESR Notification

Criteria for ESR Notification

Every company in the UAE has to let the Ministry of Finance (MoF) know about their Economic Substance Regulations (ESR) status. This includes companies that don't have to send detailed ESR reports. Even if you're exempt from filing reports, you still need to tell the MoF about your ESR status by sending a notification. This helps the MoF keep track of all companies and make sure everyone follows the ESR rules, whether they have to file reports or not.

ESR Notification for Freezone Companies

Yes, free zone companies in the UAE are subject to the notification requirements of the Economic Substance Regulations (ESR).  Regardless of whether a company operates in a free zone or on the mainland, it must notify the UAE Ministry of Finance (MoF) about its ESR status. This notification process applies to all companies, including those located in free zones, to ensure compliance with ESR regulations across the board.

Penalty for ESR Notification

If a company in the UAE doesn't send its Economic Substance Regulations (ESR) notification on time or gives incorrect information, there can be serious consequences.

It's really important for companies to stick to the ESR notification deadlines and give correct information. Getting help from legal or financial experts can make sure everything is done right and avoid these problems.

Go here to learn more about the ESR Penalty in the United Arab Emirates. 

Consequences of Ignoring ESR Non-Compliance in Dubai

Dubai enterprises should be aware of the serious consequences of failing to comply with Economic Substance Regulations. Here's the breakdown:

Financial Penalties

• Heavy Fines: Noncompliance carries significant financial penalties.
• Extra Taxes: You may face more taxes and maybe an audit.

Operational disruptions

• License Issues: Your business license may be suspended or cancelled.
• Increased Scrutiny: Authorities will scrutinize you, resulting in more operating disruptions.
• Reputation Damage: The public revelation of your noncompliance may harm your company's reputation.

Legal consequences

• Criminal accusations: Severe noncompliance might result in significant accusations and trials.

Practical issues

• Business Challenges: Noncompliance might make it difficult to obtain permits and licenses.
• Additional Cost: Implementing procedures to rectify noncompliance can be expensive, involving considerable legal fees and professional services.

ESR Services in UAE

Helping businesses with Economic Substance Regulations (ESR) in the UAE is something experts like Reyson Badger are really good at. They're well-known for their excellent work in making sure companies follow the ESR rules correctly. Reyson Badger the professional service providers are great at helping businesses with Economic Substance Regulations (ESR) in the UAE. They know all about the latest ESR rules and deadlines from authorities like the UAE Ministry of Finance (MoF). Reyson Badger, especially, is known for being really good at ESR compliance. They help businesses figure out what they need to do to follow the rules by looking at what activities they do.

Then, they help fill out the right forms and gather all the needed financial and operational info to make sure everything is correct. They make sure companies send their ESR Notification Services on time and follow all the rules. They also help with ESR Reporting Services to the relevant authorities. Reyson Badger also gives advice on how companies can do better with their economic substance, manage risks, and handle any problems with following the rules. If there are audits or questions about ESR, they are there to help and make sure companies are ready and doing things the right way. Overall, Reyson Badger is a top choice for ESR help, making it easier for businesses to understand and follow the rules, stay away from fines, and do things the right way in the UAE.