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An Ultimate Guide to ESR Compliance

Professional accountant's hand with pen calculating financial data.
The Economic Substance Regulation, or ESR, requires freezone and UAE onshore companies to preserve and demonstrate a satisfactory "economic presence" in the UAE in conjunction with the "Economic Substance Test." The act extends to fiscal years beginning on or after January 1, 2019. Entities subject to the Regulations must file an annual Declaration form and complete and submit an Economic Substance Report to the same regulatory authority within 12 months of the end of their fiscal year. Contact Fortius, one of the best ESR consultation services, if you are seeking extra help.

All About ESR Offered by ESR Consultation Services in UAE

The ESR and various types of businesses conducting economic operations in the country indicate that they preserve business growth and actual economic existence. This allows them to interconnect the profits they disclose to adequate business activity. ESR consultation services let you know about the four exceptions wherein parties are not compelled to prove their economic output. They are as follows:

  • Non-resident entities.
  • Investment funds and the special purpose vehicles (SPVs) or investment holding entities that underpin them.
  • Wholly owned UAE residents with only domestic transactions
  • UAE departments of foreign companies are subject to taxation on all Relevant Income earned in a jurisdiction.

Exempted licensees, on the other hand, must demonstrate their exemption. If they do not comply, they will be ordered to complete the ESR and take the Economic Substance Test as though they are non-exempted Licensees.

How did UAE's Economic Substance Regulation take effect? 

Following the implementation of Economic Substance Regulations in the UAE and Specific Guidance on those laws (Ministerial Decision 215 of 2019) authorized by the UAE Ministry of Finance, the EU intends to eliminate the UAE from a list of non-cooperative tax jurisdictions.

The European Union Code of Conduct Group, which is in charge of business taxation and assessing tax measures for all of its member countries, reviewed the tax policies of jurisdictions with no or nominal tax in 2019. Thus, the EU issued non-cooperative tax jurisdictions, including the UAE.

In May 2018, the UAE joined the Organization for Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) Inclusive Framework, committing to implementing the minimum standards of the BEPS Inclusive Framework. In response, the UAE released its Economic Substance Regulations on April 30, 2019, via Cabinet Decision No. 31/2019.

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An Overview of Economic Substance Regulation-related Activities

The ESR applies to any entity within the UAE that initiates "Relevant Activities." These are the Relevant Activities:

  • Insurance
  • Banking
  • Lease-finance
  • Shipping
  • Headquarters
  • Intellectual property
  • Holding companies
  • Service centers
  • Investment fund management

ES requirements should be met by any entity engaging in Relevant Activities. However, entities owned directly or indirectly by the UAE government are not covered by ES. The Economic Substance Regulations include nine relevant activities. Learn more about the specific business activities here.

Significant Elements of Economic Substance Regulation Followed by ESR consultation services 

To satisfy the ES requirements for relevant activities, the ESR consultation services must do the following:

  • Carry out core income-generating activities (CIGA)
  • Be guided and controlled in the UAE with regard to CIGA
  • Get a sufficient number of skilled full-time resources
  • Incur an adequate amount of operating expenses
  • Have ample physical assets in the UAE

An enterprise may outsource CIGA inside the UAE if the entity retains complete control and management support over those activities and the external services are also carried out within the UAE.

Also Read:Effective ESR Compliance Services & Solutions

What are a Relevant Entity's reporting requirements? 

Entities subject to the new Regulations must present a report to the Authority no later than twelve months well after the close of the entity's fiscal year. The report will then be submitted to the relevant authority by the Regulatory Authority.

What is the annual ESR Report about? 

In terms of Relevant Activity, the report must include the following information:

  • The type of activity carried out
  • Business location
  • The type and amount of income
  • The sum and nature of operating assets and expenses
  • Details on CIGA
  • The number of full-time employees with skills and experience
  • Financial year-end of the entity
  • An agreement as to whether the licensee fulfills the ES test

What happens if the Relevant Entities do not follow the regulations?

Inability to pass the economic substance test may result in administrative penalties. The penalty is 50,000 AED in the first fiscal period and 400,000 AED in successive fiscal periods. Failure to provide details can result in administrative penalties of up to 50,000 AED.

What is a Regulatory Authority? 

The regulatory authorities oversee compliance with the Regulations' notification and reporting obligations, identify potential Licensees, verify information submitted, evaluate whether an entity fulfills the criteria to be regarded as exempt, and provide data with the UAE FTA and the Ministry of Finance.

What are the requirements for ESR compliance?

All organizations operating in the UAE should evaluate their activities in light of the new ES Regulations with the help of ESR consultation services and ensure timely compliance with the law. The Regulatory Authorities have established a deadline for each jurisdiction. A licensee must submit a notification in the form mentioned by the Regulatory Authority before the time limit, which is six months after the end of the fiscal year in question. A licensee must also provide an Annual Report within twelve months of the end of the fiscal year.

Final Words

Implementing the latest Economic Substance Regulations marks a significant step forward in the UAE's tax policy toward compliance with the OECD and BEPS directives. It demonstrates the UAE's commitment to limiting global tax avoidance strategies that take advantage of shortfalls in tax laws worldwide. Because of the UAE's status as an international business hub, many businesses are likely to fall under the purview of UAE ESR. At the same time, being in a global business hub offers these companies the tools and instruments they need to pass the substance test. Consult with professional business consulting and CFO services like Fortius Consulting Services to evaluate the ESR position of any Licensee and fulfill the ESR requirements within the given deadlines.

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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