All About Economic Substance Regulations in UAE
Economic Substance Regulations in UAE (ESR) is one of the major steps taken by the country to meet global tax standards. The rules came as part of the UAE’s commitment to the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Earlier, the European Union placed UAE on its tax blacklist. To fix this, the UAE introduced ESR on 30 April 2019 and later updated it on 11 September 2019. These changes helped remove the UAE from the EU blacklist by October 2019.
The purpose of ESR is to ensure companies don’t shift profits to the UAE without carrying out real economic activities here. It applies to all UAE companies engaged in specific “Relevant Activities.” Businesses must notify the authorities and file returns when required. If they fail, they face fines from AED 10,000 to AED 300,000. However, companies owned 51% or more by the government are exempt.
Highlights of UAE ESR
- ESR applies from 01 January 2019 onwards.
- Companies must check their financial year for compliance.
- Notifications must include:
- Financial year-end
- Relevant activity of licensee
- Any income from the activity
- If the income is taxed outside UAE
Relevant Activities include:
- Banking Business
- Insurance Business
- Investment Fund Management
- Lease-Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual Property (IP) Business
- Distribution & Service Centre Business
Understanding the Economic Substance Test
Companies carrying out relevant activities must pass the ESR test. This requires:
- Assessing activities during the financial year.
- Calculating income from these activities.
- Holding board meetings and recording minutes.
- Having qualified full-time staff.
- Proving expenses and premises in UAE.
- Supervising outsourced activities with contracts.
If no income is earned, a notification only is required. But records must be kept for six years.
Role of Regulatory Authorities
Authorities ensure compliance by:
- Identifying relevant licensees.
- Monitoring notifications and returns.
- Sharing information with the FTA and Ministry of Finance.
- Checking exemptions.
Examples of authorities: Central Bank, Ministry of Economy, DIFC, DMCC, RAKEZ, SAIF Zone, JAFZA, ADGM, and others.
Why ESR is Important for Companies?
ESR proves that UAE firms with relevant activities are not just earning profit without substance. The benefits include:
- Fair Tax Regime – Stops companies from booking profits without real operations.
- Transparency – Aligns UAE with global reporting standards.
- Compliance with BEPS – Shows UAE’s role in reducing tax evasion worldwide.
- Reputation – Improves trust of international investors.
ESR and Free Zones
Free zones are treated as “Designated Zones” if they meet strict customs and security rules. ESR applies equally in such zones. Some major free zones with ESR rules include:
- DIFC – All licensees must notify by 12 June 2020 and file returns within 12 months.
- ADGM – Entities must meet ESR if engaged in relevant activities and file annual returns.
- RAKEZ – Mandatory ESR filing for businesses from 1 Jan 2019 financial years.
- DAFZA – ESR notification deadline 31 May 2020; return due within 12 months.
- Ajman Free Zone – Notifications due 30 June 2020 with compliance required.
- DMCC – Firms must file annual ESR notification and return by June deadlines.
- SAIF Zone – Requires annual ESR return for entities in relevant activities.
🥇 What Can Help – Mubarak Al Ketbi (MAK) Auditing
At Mubarak Al Ketbi (MAK) Auditing, we help businesses stay compliant with ESR in UAE. From preparing notifications to filing ESR returns, our experts guide you step by step. We also ensure your contracts and records meet ESR standards.
As the saying goes, “An ounce of prevention is worth a pound of cure,” timely compliance saves your business from heavy penalties.
For more information visit our office:
- 📍 Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- 📞 Contact/WhatsApp: +971 50 276 2132
