The UAE business world faced new changes when Economic Substance Regulations (ESR) came into effect. These rules were introduced in line with OECD requirements to stop harmful tax practices. ESR ensures that companies pay fair tax in the country where their income is generated. It blocks the use of offshore structures that avoid taxes and keeps businesses more transparent.
In UAE, ESR applies to companies that perform Core Income Generating Activities (CIGA). These include:
- Banking services
- Insurance activities
- Fund management
- Financing and leasing
- Headquarter businesses
- Shipping operations
- Holding companies
- Intellectual property activities
- Distribution and service centers
Companies owned by the UAE government or its sub-authorities are excluded. Every private business in these categories must meet ESR rules.
🥇 Key Tests Under ESR
To comply with ESR, companies must meet three main tests:
- Management Test – The company must be managed and directed inside the UAE.
- CIGA Test – Core income-generating activities must be performed within the UAE.
- Adequacy Test – The company must have adequate staff, premises, and yearly operating expenses in the UAE.
Failure to meet these tests will expose companies to fines or even license cancellation.
🥇 Major Impacts of ESR on UAE Businesses
The UAE government enforces ESR strongly, and deadlines for compliance are strict. Businesses that fall under ESR face several direct impacts:
- Performing CIGA in UAE: Businesses must shift income activities fully to UAE.
- Direction and Management: Decision-making must be based in UAE offices.
- Employee Requirements: Firms need qualified staff present in UAE or must outsource work to UAE service providers.
- Operating Costs: Companies must spend enough operating expenditure inside UAE.
- Physical Assets: Businesses need premises or adequate outsourced resources within UAE.
These measures force companies to operate transparently and strengthen the UAE economy.
🥇 Benefits of ESR Implementation
While ESR brings strict rules, it also provides long-term benefits for UAE businesses:
- It improves accountability and governance.
- It reduces illegal tax practices.
- It ensures accurate reporting of business activities.
- It increases fair competition between companies.
- It enhances investor trust and international credibility.
Every company must submit reports annually. Businesses performing relevant activities must file an ESR notification by June 30 and submit the yearly return by December 31.
If a company doesn’t comply with ESR, its license may not be renewed. In serious cases, the firm may face liquidation. Compliance protects companies from such risks.
🥇 Reporting Duties Under ESR
Each company must:
- File a notification declaring whether it performs relevant activities.
- Submit annual ESR reports if relevant activities exist.
- Maintain accurate details of expenses, staff, and assets.
- Provide complete documentation to the regulator.
Failure to comply leads to penalties and loss of credibility.
🥇 How Mubarak Al Ketbi (MAK) Auditing Helps Businesses
Mubarak Al Ketbi (MAK) Auditing provides expert ESR compliance support in UAE. Their professional team ensures companies meet all ESR requirements with accuracy.
Services include:
- Conducting ESR impact studies.
- Performing compliance and substance tests.
- Reviewing contracts for ESR obligations.
- Submitting ESR reports on time.
- Advising on restructuring to meet ESR rules.
With MAK Auditing, businesses stay compliant, avoid penalties, and maintain growth.
🥇 Frequently Asked Questions (FAQs)
Q1. What is the purpose of ESR in UAE?
Ans: ESR ensures companies perform real activities in UAE, pay fair taxes, and avoid harmful tax practices.
Q2. Which businesses must follow ESR?
Ans: Companies in activities like banking, insurance, fund management, IP, shipping, and holding must comply.
Q3. What happens if a business fails ESR compliance?
Ans: Non-compliance may result in penalties, license cancellation, or even liquidation.
Q4. What reports are required under ESR?
Ans: Companies must file an annual ESR notification by June 30 and submit ESR returns by December 31.
Q5. How does Mubarak Al Ketbi (MAK) Auditing help with ESR?
Ans: MAK Auditing conducts ESR tests, prepares reports, and ensures timely compliance for businesses in UAE.
🥇 What Can Help You — Mubarak Al Ketbi (MAK) Auditing
Economic Substance Regulations are vital for UAE businesses. Mubarak Al Ketbi (MAK) Auditing provides expert ESR compliance services. They guide companies with reports, restructuring, and contract reviews. Their skilled team ensures accurate filings and helps avoid penalties. As the saying goes, “a stitch in time saves nine” — early compliance prevents bigger problems later.
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
