ESR Compliance in UAE: Key Insights for Businesses

Economic Substance Regulations (ESR) are vital to companies operating in the Emirates. These regulations apply to specific business types, which should perform certain activities to prove their economic presence. So, if you want to start a company in Dubai or other UAE regions, either onshore or free zone, you may have to depict sufficient activeness rather than only remain as an entity enjoying low tax rates or shifting profits. The intention is to present that the profit generated meets the company’s economic activity level in the country.

While ESR compliance does not directly impact the company registration in the UAE, you must know what it specifies, and what requirements you must fulfill. Read more to understand the ESR implementation, business activities involved, the mandatory criteria a company must meet, etc.

Introduction to ESR: Which Business Activity is Eligible

ESR was introduced in April 2019 through the Cabinet of Ministers Resolution No. 31 of 2019 (Resolution 31). The intention was to meet international tax standards like that of the European Union and the OECD. However, on 10 August 2020, Resolution 31 was replaced by Resolution No. 57 of 2020 (Resolution 57) and other resolutions. The eligible company must report and file for ESR every year.

Yet ESR compliance is one of the leading norms for a company registered in the UAE performing the following business activities. Note that the following list is not exhaustive (consult us for more information):

Banking or insurance business
Distribution and Service Centre business
Lease - finance business
Investment fund management
Intellectual Property (IP) business
Headquarters business
Holding Company business
Shipping business

ESR Requirements, Annual Notification, and Report

Economic Substance Regulations apply to local companies in the UAE, including companies in the free zones and those performing relevant activities. Submitting an Economic Substance Report and Notification is mandatory every year, according to the Cabinet Resolution provisions. Since requirements may change depending on the type of activity, business setup consultants in the UAE can help understand the compliant business activities.

Complying with Economic Substance Regulations helps the UAE government understand the business’s profits and how they contribute to the nation’s economic activity. Once you start a company in Dubai and fall under the ESR compliance, here are the requirements to meet:

Demonstrate that you manage the business activities from the UAE. To signify this, you may hold board meetings in the Emirates and have directors or management based within the UAE.
The company should also have an office space, enough qualified employees, and yearly operating expenses representing the business activities.
If you participate in a relevant activity, submit a notification a maximum of 6 months from the end of the fiscal year. Confirm if a relevant activity was performed and you had to bear taxes outside the UAE for the earned income. This also applies to businesses that did not earn an income or are exempt.
You must retain business-related financial documents, employee records, and proof of income-generating activities as evidence of ESR compliance.
Filing an annual report containing a self-assessment about economic substance criteria met, number of qualified staff members, income earned, details of the assets utilized for the activity, office space, and others.

Timeline for ESR Compliance: Points to Remember

ESR registration is a one-time requirement and you must go for it the moment you start a company in Dubai and the UAE, or commence with relevant business activity. Companies exempt from ESR are those owned wholly by the residents of the UAE, not a part of any foreign entity-owned UAE branch or a multinational group whose income applies tax under a foreign jurisdiction. You can consult us at The First Partner to have our eligibility analyzed for ESR exemption.

Submit the Notification electronically on the ESR portal of the Ministry of Finance. Here is the deadline to consider when complying with Economic Substance Regulations :

The deadline to file a Notification is within 6 months from the Licensee’s fiscal year’s end. For instance, if the financial year ends on March 31, June 30, September 30, or December 31, the company must file the Notification within September 30, December 31, March 31, or June 30, respectively. A maximum of 12 months is given to submit Economic Substance Reports from the end of the fiscal year.
The reportable period starts on or after 1 January (following the Gregorian calendar - from 1 January to 31 December), for which the company files the Notification. You need to mention the start and end date of the reportable period.
A Licensee has a short period of account (31 March) if the incorporation took place on 1 October. Similarly, if the company was incorporated on 1 January, it has a long period of account, which is 31 March for that fiscal year.
Some documents you may need are a business incorporation certificate, trade license, establishment card, Memorandum of Association (MoA), passport, mobile number, email ID, and Emirates ID of directors/shareholders, apart from other papers asked by the authorities.

What If You Fail at ESR Non-Compliance?

Non-compliance with the obligation to file a Notification before the deadline is subject to a penalty of AED 20,000. Further penal actions, fines, and implications are listed below :

A penalty of AED 50,000 is applicable for providing incorrect or false information in the Notification. The same is true for falsely claiming an exemption from the ESR or deliberately submitting false details, which can deem that the Licensee has failed the Economic Substance Test for the relevant reportable period.
If the non-compliance case is serious, the UAE may report the business to the tax authorities of different jurisdictions, triggering audits, legal issues, and investigations in the home country.
Damage to the company’s reputation in the eyes of partners, clients, and others, raising questions over the business integrity and scope of continuing the relations.
The risk of license revocation looms over companies for non-adherence to the regulations, having to reapply for company registration in the UAE and resume activities.

NOTE: UAE businesses are exempt from ESR compliance according to the 2024 amendments. However, this applies only for the financial period following 1 January 2023. Compliance is mandatory for a company falling in the ESR period purview of 1 January 2019 to 31 December 2022 by notifying and reporting annually and performing sufficient activities within the UAE. The business must keep the records for 6 years at the minimum so that the Federal Tax Authority can verify the licensee and review compliance with the ESR test in this duration.

Also, administrative penalties have been relaxed over ESR non-compliance outside the mentioned ESR period. The companies with penalties can request refunds from the UAE Ministry of Finance on their e-refund portal and reclaim fines paid earlier.

To Conclude

We at The First Partner assist you as business setup consultants in the UAE, choosing between mainland/freezone/offshore, filing corporate tax and VAT, accounting, complying with the required regulations, and a lot more. We also conduct an Ultimate Beneficial Owner (UBO) declaration and aid in meeting the Economic Substance Regulations. Our assistance is not just to start a company in Dubai, but to provide complete support to businesses planning relocation or beginning new operations.