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Ways to Identify if Your Firm Falls Under ESR Norms

Complying with the UAE's ESR (Economic Substance Regulations) is a must-do for regional business owners. These rules, which went into effect in the UAE for financial years beginning January 1, 2019, and beyond, cover a wide range of sectors within the country. Companies must ensure that they comply with ESR guidelines to avoid heavy fines. You can get professional help from ESR compliance services like Fortius to escape penalties and run the business without hassle.

All You Need to Know About ESR Compliance Services

The UAE issued the Economic Substance Regulations to reduce unfair business practices and closely track the international benchmark set by the Organisation for Economic Co-operation and Development (OECD). As a member of the OECD framework, the UAE introduced a resolution on Economic Substance on April 30, 2019, in response to an assessment of the UAE's tax structure by the EU (European Union) Code of Conduct Group on Business Taxation.

Economic substance is an ideology in US tax law - followed by several others worldwide - that any transaction should have a definite purpose other than reducing tax liability and an economic effect other than the tax effect to be deemed valid. UAE implemented VAT and an excise tax on certain goods in 2018. Corporation taxes are imposed on oil companies and foreign banks operating in the country. The UAE Ministry of Finance announced on January 31, 2022, the emergence of a federal Corporate Tax on business gains from the fiscal year commencing June 1, 2023. There is no broadly applied tax on business gains yet, and the UAE remains a low-tax setting for most businesses compared to other jurisdictions. With fiscal transparency as an international priority, financial organizations like the OECD advocate for improved global cohesion on tax regulation, including measures to combat tax evasion, so businesses will not profit from variations in tax legislation worldwide.

Governments are collaborating to establish a unified network of legislation to enable transparency - allowing the exchange of fiscal information. This includes, in particular, taking measures to combat the utilization of the local tax regime to produce new structures without substantive business activity, as well as curbing other harmful tax practices in zero and low-tax jurisdictions. This is where the ERS rules come into action. The European Union, in particular, has selected to actively protect and serve these principles by imposing penalties on countries that fail to meet clear targets based on these fundamentals.

An Overview of Organizations Under the Scope of ESR Norms in the UAE

All UAE offshore, free zone, and onshore businesses, such as insurance firms, banking, investment fund managers, shipping, financing, leasing firms, distribution and service stations, intellectual property firms, or holding companies, are to take full responsibility for handling all business activities. The regulations require UAE companies that engage in the activities listed below to demonstrate sufficient economic substance. Get help from ESR compliance services to know in detail about the ESR norms in the UAE.

Companies operating in these sectors are classified as "relevant entities" and should follow economic substance regulations. This applies to all businesses established in the UAE (with an exception of those with a minimum of 51% indirect or direct investment from government authorities) with income from a particular sector in any auditing period beginning from or after January 1, 2019. On the other hand, allowances will be less rigid for those in charge of holding companies and special rules and will pertain to everything involving high-risk intellectual property.

Fortius Consulting, a UAE-registered management consultancy firm, specializes in business advisory and consulting services. We help identify business risks and provide incredible business growth opportunities and solutions with qualified chartered accountants. Elevate your business to a global level with us.

ERP implementation support Bookkeeping and accounting services Business advisory services
Business consulting Services Business incorporation services Interim CFO services
Corporate tax compliance Risk management consulting ESR consultation services
Financial feasibility study services Management consultants Mergers & acquisition advisory
Tax planning services Tax compliance services VAT implementation services

Learn About the Economic Substance Tests That ESR Compliance Services Perform on Firms

All firms under the previous section generate income during the specified auditing period and demonstrate sufficient substance in the UAE. The following are the basic requirement tests that will let the government ascertain whether or not firms comply with the norms.

The Guided & Managed Test 

The regulations specify how a company in the UAE must be guided and managed. For instance, whether:

  • The company holds board meetings on a regular basis
  • The quorum of directors is physically present during such meetings
  • The directors possess the needed skills and knowledge to disperse their responsibilities
  • The meeting minutes are kept in the jurisdiction

CIGA Test 

The company must demonstrate that these activities are carried out under the regulatory authority and in proportion to the amount of income generated by the relevant activity. The CIGAs can be outsourced to ESR compliance services with constant monitoring provided by the firm. However, corporate service providers are unlikely to be comfortable performing key CIGA functions due to liability concerns.

The Adequate Test 

This determines whether your company has an adequate amount of qualified permanent employees, a sufficient quantity of operating expenditure, and satisfactory physical assets in the UAE. The firm must maintain an adequate physical existence in the jurisdiction (like office space).


A Brief on Penalties 

Businesses must ensure that they follow ESR guidelines to avoid heavy penalties. They must then assess the impact on their operations. Failure to submit a notification or providing incomplete information will lead to paying a 10,000-50,000Dh fine. If you do not prove adequate 'economic substance' in the UAE for the following financial year, you may face a 300,000Dh fine. So, you must understand the rules. If you own a company in the UAE, you should get in touch with ESR compliance services, reconsider its hierarchy and ensure that its activities fall under the ESR classifications.

The Bottomline

Whether you're establishing a free zone or onshore business, a one-man band, or a multinational corporation, you have to engage in one of the numerous related tasks mentioned here, and it must comply with the rules of the new economic substance. To be more precise, specific types of organizations must be directed within the Emirate, have a sufficient number of full-time UAE-based employees, generate the majority of their revenue in the nation, maintain a good quantity of assets, and showcase good operational expenses in the UAE. Contact Fortius Consulting Services, one of the best business consulting services in the UAE in the UAE, if you want your business to operate without hassle.

Fortius Consulting Services is a trusted name for business consulting and CFO services in the UAE, Singapore and India. Through our expert consulting and advisory services,we assist organisations across the UAE & Asia to boost their profitability, improve operational effectiveness, increase management capability, institutionalise strategies, and upgrade their internal structures.


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