In recent years, the UAE has taken significant steps to align with international standards of economic transparency and tax governance. A key component of this effort is the implementation of the Economic Substance Regulations (ESR). For businesses operating in the UAE, particularly those within the scope of these regulations, understanding and complying with ESR requirements is crucial. At ALM, we are committed to guiding you through this process.
What is ESR?
Economic Substance Regulations were introduced in the UAE in 2019, aimed at ensuring that companies engaged in certain activities have substantial activities and management presence in the UAE. The goal is to prevent harmful tax practices and ensure fair tax competition.
Who Needs to Comply?
ESR applies to companies carrying out one or more of the following "Relevant Activities":
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Distribution and Service Centre Business
If your company falls under any of these categories, ESR compliance is mandatory.
ESR Notification: What You Need to Know
All companies conducting Relevant Activities must file an annual ESR Notification. This notification should include:
- The type of Relevant Activity conducted
- The financial period under review
- Confirmation on whether the income is subject to tax outside the UAE
- Details on whether the Relevant Activity is conducted within or outside a Free Zone
Deadline: The ESR Notification is typically due within six months from the end of the financial year.
ESR Reporting: Ensuring Compliance
In addition to the notification, companies must file an ESR Report if they earn income from Relevant Activities. The report should demonstrate that the company meets the Economic Substance Test in the UAE, which includes:
- Core Income-Generating Activities (CIGAs): Evidence that the company is conducting significant activities in the UAE.
- Management and Control: Proof that the company is directed and managed in the UAE.
- Adequate Employees and Physical Assets: Verification that the company has adequate staff and physical assets in the UAE relative to its activities.
Deadline: The ESR Report is due within twelve months from the end of the financial year.
Consequences of Non-Compliance
Non-compliance with ESR can lead to significant penalties, including:
- Fines ranging from AED 20,000 to AED 400,000
- Exchange of information with foreign competent authorities
- Potential suspension, revocation, or non-renewal of business licenses
How ALM Can Help
Navigating ESR requirements can be complex, but ALM is here to assist you every step of the way. Our services include:
- ESR Assessment: Evaluating whether your business falls under the scope of ESR.
- Notification and Reporting: Assisting with the preparation and submission of ESR Notifications and Reports.
- Compliance Review: Ensuring all necessary documentation and evidence are in place to demonstrate compliance.
- Advisory Services: Providing ongoing support and guidance to keep your business compliant with ESR regulations.
Final Thoughts
Staying compliant with ESR is not just a legal obligation but also a commitment to transparency and good governance. At ALM, we understand the challenges and intricacies involved in ESR compliance and are dedicated to helping you meet these requirements seamlessly.
For more information on how we can support your ESR compliance efforts, please contact us today.
