The ESR (Economic Substance Regulations) mandates UAE onshore and free zone firms, as well as specific other company types, to maintain and establish an acceptable "economic presence" in the UAE in relation to the activities they do ("Economic Substance Test"). The rule applies to fiscal years beginning on or after January 1, 2019. Entities subject to the regulations must disclose a yearly declaration form to the regulatory authority and complete and submit an Economic Substance Report to the same authority within 12 months of the end of their fiscal year. At Fortius Consulting Services, we provide the best ESR consultation services that are cost-effective and fulfill all the requirements effectively.

An Overview of How ESR Consultation Services Takes Effect in the UAE

In 2019, the (EU) European Union Code of Conduct Group, responsible for company taxation and evaluating tax measures for all member states, assessed the tax policies of territories with no or minimal taxation. In response, the European Union Code published a list of non-cooperative jurisdictions, which includes the United Arab Emirates.

In May 2018, the UAE joined the BEPS (Base Erosion & Profit Shifting) Inclusive Framework of the OECD (Organisation for Economic Co-operation and Development), through which the UAE committed to fulfilling the minimal criteria of the BEPS Inclusive Framework. In response, the UAE released its ESR (Economic Substance Regulations) on 30 April 2019 via Cabinet Decision No. 31/2019.

Activities Listed Under the ESR

The Economic Substance Regulations apply broadly to any organization (Free Zones or Mainland) inside the United Arab Emirates that engages in "Relevant Activities." These Relevant Activities consist of the following:

• Banking Business
• Investment Fund Management Business
• Insurance Business
• Leasing and Finance Business
• Shipping Business
• Head Office Business
• Intellectual Property (IP) Business
• Holding Company Business
• Distribution and Service Centre Business

An entity conducting the activities mentioned above must adhere to the requirements for Economic Substance. However, ES does not apply to companies indirectly or directly managed by the UAE federal or municipal.

Essential Components of the Regulation of Economic Substances

The following are some of the most critical considerations for ESR (Economic Substance Regulation):

Who Are the Relevant Entities?

To satisfy the ES criteria for related operations, the entity must meet the following conditions in the UAE. They are:

• Have a suitable number of experienced full-time resources
• Conduct (CIGA) Core Income-Generating Activities
• Incur an adequate level of operational expenses
• Be managed and supervised with regard to its CIGA
• Have sufficient physical assets

A company may outsource the CIGA inside the UAE so long as it retains complete control and appropriately supervises the outsourced operations and the outsourced activities are conducted within the UAE.

What Are the Relevant Entity's Reporting Requirements?

Entities subject to the new rules will be obliged to produce and submit the report to the License granting Authority within twelve months of the end of their fiscal year. The Regulatory Authorities will subsequently send the report to the appropriate authority, the Ministry of Finance of the United Arab Emirates.

What Does the Yearly ESR (Economic Substance Regulation) Report Contain?

The report must contain the following details regarding the related activities:

• The volume and nature of income
• The type of work done
• The amount and kind of operational expenses and assets
• The number of qualified full-time employees
• The location of the business
• Details about CIGA
• Gross revenue from a related activity is taxable outside the UAE
• A statement indicating whether the licensee meets the ES requirement
• The entity's fiscal year-end occurs outside the UAE

What Are the Functions of ESR Regulatory Authorities?

The functions of ESR regulatory authorities are to:

• Identify potential licensees
• Decide whether a relevant business fits the standards for exemption
• Validate the information given by licensees
• Communicate collected data with both the UAE Ministry of Finance and the Tax Authority

What Are the Licensee Definitions as Per Regulations?

A Licensee is a legal entity or unincorporated association registered in the United Arab Emirates that engages in a related activity. These consist of the following:

• Private Shareholding Company
• (LLC) Limited Liability Company
• Partnership
• Joint Venture Company (JV)

As per the regulations, a single proprietorship, foundation, or trust has not been deemed a Licensee.

What Happens if Relevant Entities Do Not Comply With the Regulations?

Non-compliance may result in civil penalties if the EST (economic substance test) is not met. Non-Compliance penalties are:

• Failure to submit ESR report: AED 50,000
• Failure to submit ESR notification: AED 20,000
• Failure to meet the ESR test:
  a. 1st year: AED 50,000
  b. 2nd consecutive year: AED 400,000
• Failure to provide complete or correct information: AED 50,000
• Failure to comply: Financial penalties (AED 20,000 to AED 400,000), Suspension, withdrawal, non-renewal of trade license

Other sanctions for violations include administrative consequences, including termination or non-renewal of the entity's issued trade license or permit. In layman's terms, you must prove to the regulators that you engage in legitimate economic activity on the market and that your activity meets the (EST) Economic Substance Test and the regulatory standards.

When Does the ESR Need to be Submitted?

Companies and institutions engaged in any of those mentioned above "related activities" in the UAE must submit annual declarations and statements to the regulatory authority.

• Failure to comply with the regulations will result in disciplinary action.
• The ESR notification must be submitted within six months of the close of the fiscal year.
• The ESR report must be submitted within 12 months of the conclusion of the fiscal year.

All organizations operating in the UAE must evaluate their actions in light of the new ESR and guarantee timely adherence to the reporting requirements. An entity is not obligated to file an ESR Economic Substance Report for a fiscal period if it has not received money from a related activity or if it fits the exemption criteria. It must, however, submit the Declaration form.

A Gist on the List of Licensees Who Are Not Subject to ESR

The below licensees are not required to submit an ESR (Economic Substance Report) or demonstrate substance in the UAE:

• An investment company and its fundamental investment holding entities.
• A native resident living outside the UAE.
• A UAE-resident business that doesn't belong to a multinational organization and operates only in the UAE.
• Licensees must disclose substantial proof along with the confirmation letter to claim any of the aforementioned exemptions.
• A non-resident must pay tax on all their applicable income earned abroad.

Closure

The implementation of the new ESRs (Economic Substance Regulations) is a major step in the United Arab Emirates (UAE) tax policy's conformance with the Base Erosion & Profit Shifting (BEPS) recommendations of the OECD (Organization for Economic Cooperation and Development). The Regulations were enacted to guarantee that UAE entities declare their actual income from economic activity conducted within the UAE. In addition, it illustrates UAE's dedication to preventing international tax avoidance programs that exploit the gaps and inconsistencies in tax regulations worldwide. Get in touch with Fortius Consulting Services if you are on the lookout for top-notch ESR consultation services in the UAE.