To contest harmful tax practices and comply with international standards, the UAE introduced the Economic Substance Regulations (ESR) on April 30, 2019. The Regulations were further illuminated through Ministerial Decision No. 215 of 2019. They plan the requirements for UAE-based businesses engaged in relevant activities to meet an economic substance test.
This test is intended to demonstrate that companies have a suitable economic presence in the UAE. To ensure obedience, businesses must submit an annual UAE economic substance report to the governing authorities. In this article, we will delve into the key requirements of UAE Economic Substance Reporting you can also take help from Economic Substance Regulations experts.
Reporting and Notification of Economic Substance in UAE
Companies in the UAE conducting relevant activities must inform the regulatory authority annually. They must disclose if they are performing activities such as;
- Whether they are carrying out a related activity in the UAE
- Whether any revenue is subject to tax outside the UAE
- The period of the financial year
They need to submit a report every year to validate if they pass the UAE economic substance test, including information on activity, income, expenditures, and assets. The report must be submitted within 12 months after the end of the financial year.
What are the Relevant Activities for UAE ESR?
The Relevant Activities for UAE Economic Substance Reporting are as follows:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Distribution and Service Center Business
Companies that engage in any of these Relevant Activities and generate income from such activities must comply with the UAE Economic Substance Regulations. This includes reporting on their economic substance and providing evidence of relevant activity, income, expenses, and assets. Failure to comply with these requirements may result in penalties and potential sanctions.
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How to Evaluate Whether your Business is Required to Submit an ESR in the UAE?
To evaluate whether your business is required to submit an Economic Substance Report (ESR) in the UAE, you need to consider the following steps;
1- Determine if your business conducts Relevant Activities
Review the activities your company engages in and determine if any of them fall under the UAE’s Relevant Activities list.
2- Assess the income generated from Relevant Activities
Determine if your firm earns income from Relevant Activities and if any of that income is subject to tax outside the UAE.
3- Determine if the company is tax occupant in the UAE
If the company is a tax resident in the UAE, it is required to submit an ESR regardless of whether it conducts Relevant Activities or earns income from them.
4- Evaluate if the company meets the economic substance test
If your company conducts Relevant Activities and makes income from them, you must evaluate if it meets the economic substance test. This test defines whether the company has adequate economic substance in the UAE, such as having sufficient employees, assets, and expenditures, to conduct its activities.
As per the rules, businesses are allowed to carry out one or more Relevant Activities within the same financial period. Companies must demonstrate economic substance in each activity unless those activities are considered ancillary to the primary activity.
Moreover, the regulations permit the alliance of ancillary activities under the main Relevant Activity, to avoid any identical reporting.
Penalties for Waning to Comply with the UAE Economic Substance Reporting
Non-compliance with the Economic Substance Test Reporting Regulations may result in numerous penalties and actions by the authorities in the UAE. Businesses failing to comply with these regulations will be endangered to fines ranging from AED 10,000 to AED 50,000, depending on the nature of the violation. Such violations are;
- Failure to inform
- Failure to provide correct or comprehensive information
- Failure to validate economic substance in the UAE
- Failure to validate adequate economic substance in the relevant financial year
Recurrent failure to validate adequate economic substance may result in a fine of up to AED 30,000, and may also lead to;
- Suspension of the company’s trade license
- Withdrawal of the company’s trade license
- Non-renewal of the company’s trade license
It is significant for businesses to comply with the regulations to avoid these penalties and actions, which could potentially impact their corporate operations in the UAE.
Obeying the Economic Substance Test Reporting Regulations is vital for companies operating in the UAE. Failure to comply with these regulations may result in severe penalties and actions. To ensure compliance with these regulations and avoid any potential penalties, companies should seek assistance from top leading firms like Economic Substance Regulations in Dubai, UAE. offers a wide range of services including;
- Tax advisory
- Audit services and many more
Their capable team helps companies in meeting their regulatory requirements. By availing of these services, companies can ensure that they remain compliant with the regulations and focus on their core operations.