FAQs On ESR

Entities subject to ESR Regulations must:

• File and submit an annual Notification within six months from the end of the relevant financial period
• File and submit an Economic Substance Report within 12 months from the end of the relevant financial period
• Meet Economic Substance Test through which they must demonstrate that the licensee and relevant activity are being directed and managed in UAE, the relevant Core Income Generating Activities (CIGAs) are being conducted in UAE, and the licensee has enough people, expenditure, and premises in UAE

A licensee can be a juridical person incorporated inside or outside the UAE or an unincorporated partnership. The licensee must be registered in the UAE, including a free zone and a financial free zone, and must carry on relevant activity.

A licensee can be a limited liability company, private shareholding company, public shareholding company, joint venture company, or a partnership. A natural person, sole proprietorship, foundation, and trust cannot be a licensee.

An exempted licensee is any one of the following:

• A licensee that is an investment fund
• A licensee that is a tax resident in some other jurisdiction
• A licensee that is a branch of a foreign firm whose relevant income is subject to tax in a jurisdiction other than the UAE
• A licensee wholly-owned by one or more residents of UAE is not a part of an MNE Group and operates in UAE only

Any other licensee as defined by the Ministry of Finance

The following activities are considered as “Relevant Activities” under ESR Regulations:

• Banking
• Insurance
• Shipping
• Lease finance
• Intellectual property (IP)
• Fund management
• Distribution and service centers
• Headquarters
• Holding Company

As per the National Assessing Authority and the Competent Authority, the licensee must include the following information in the Economic Substance Report for the relevant financial year:

• Type of relevant activity it conducts
• Type and amount of relevant income earned from it
• Type and amount of operating expenses for conducting relevant activity
• Type and amount of assets in the relevant activity
• Location of business and details on plant, property, and equipment used for conducting relevant activity in UAE
• Financial statements
• Core Income Generating Activity
• Details on the number of full-time employees, their qualifications, and number of employees working on the relevant activity
• Declaration on its compliance with Economic Substance Test
• In the case of an Intellectual Property Business, a declaration on whether it is a high-risk IP licensee or not

Every licensee and exempted licensee must include the following information in the annual notification submitted to the regulatory authority:

• The start and end date of its financial year
• The relevant activity during the relevant financial year
• Information on whether the entity has generated relevant income or not during the relevant financial year
• Any other information requested by the regulatory authority

In addition to these, the exempted licensees must submit all the documents that prove their status as exempted licensees.

A license that is not an exempted licensee must meet the following conditions for Economic Substance Test:

• Must carry out the necessary CIGA in UAE
• The direction and management of the relevant activity must occur in UAE
• The level of relevant activity must be such that the licensee has:
  • Enough highly qualified, full-time employees physical present in UAE and conducting that activity
  • The licensee has adequate physical assets in UAE, and
  • The licensee incurs adequate operating expenditure in UAE

Under ESR Regulations, an entity claiming itself to be an exempted licensee needs to submit the proof of its exempted licensee status to the relevant regulatory authority. This proof must be submitted for each financial year for which it stands exempted. It should submit the following documents:

• A notification and
• One of the following:
  • A letter or certificate from a foreign jurisdiction’s competent authority in which the entity is a tax resident. The certificate must state that the entity is a tax resident for corporate income tax purposes in that jurisdiction; or
  • Any evidence of the tax paid by the entity to the competent authority of the foreign jurisdiction where it claims to be a tax resident

Relevant income is the gross income generated by the licensee from conducting the relevant activity as recorded in the accounts prepared as per the applicable Accounting Standards. The gross income may be earned in or outside the UAE irrespective of profits or losses from these activities.

A licensee that outsources a CIGA is required to meet the Economic Substance Test if it satisfies the below criteria:

• The CIGA activity is carried out by the outsourcing provider in UAE
• The outsourcing provider complies with the requirement of adequate employees, expenditure, and physical assets in respect of the CIGA in the UAE
• The licensee can control, monitor, and supervise the conduct of the CIGA by the outsourced provider in the UAE
• The employees, expenditure, and physical assets counted in UAE for the licensee must not be counted again in some other jurisdiction as proof of compliance with the Economic Substance Test

If a branch is registered in UAE with the parent entity also registered in UAE, then the branch is not a separate legal entity. The parent is subject to ESR Regulations and has to submit the relevant documents considering relevant activities of itself and all its branches.

If a branch is registered in UAE and carries out relevant activity, but the parent entity is in some other jurisdiction, then it has to comply with UAE’s ESR Regulations if it is not under the scope of taxation of the parent entity’s jurisdiction.

If a UAE entity is carrying out relevant activity through a branch registered outside UAE, then the parent entity is not required to include the branch activities and income in its calculation under ESR Regulations. But, the foreign branch carrying out the relevant activity and earning relevant income must be subject to tax in the jurisdiction of the branch location.

To consider a relevant activity as directed and managed in the UAE, the following conditions must be satisfied:

• The Board of directors of this entity meets at an adequate frequency to make decisions in UAE
• A quorum of directors is physically present in UAE in the meetings
• The entity records the meetings, writes the minutes of meeting (MoM), and the directors who attended the meetings sign the MoM
• The MoM includes all the strategic decisions related to the Relevant Activity taken in the Board Meeting
• The directors have the knowledge and expertise to discharge the duties of the Board
• The records and MoMs of the entity are kept in UAE

In principle, the employees performing the CIGAs for the licensee must be UAE residents. If they are non-resident employees, they must be:

• Physically present in UAE and directed by the licensee while the relevant activities are being carried out
• And the licensee must pay for relevant expenses of the non-resident employees

An entity must take care of the following matters before the end of the financial year:

• Use substance over form approach to check the relevant activities it has performed
• Assess whether it has earned relevant income from these relevant activities’ performance during the financial year
• Check whether it has held board meetings in UAE where a quorum of directors was physically present
• Check whether it has the MoM of all the board meetings signed in the UAE
• Identify the number of UAE-based full-time employees engaged in the relevant activity and their qualifications
• Identify the type and amount of assets as well as type and amount of expenses in respect to the relevant activity
• Ensure it has the control and supervision power in any outsourcing arrangements where the relevant activity is being outsourced

The relevant regulatory authorities in the UAE as per the ESR Regulations include:

At the federal level:

• Ministry of Economy
• Central Bank
• Insurance sector of the Central Bank
• Security and Commodities Authority

At Emirates level:

Dubai

• Dubai Airport Free Zone
• Dubai International Financial Center
• Dubai Aviation City Corporation/ Dubai South
• Dubai World Trade Center
• Dubai Development Authority
• Dubai Multi Commodities Centre
• Dubai Maritime City
• Dubai Silicon Oasis
• International Humanitarian City
• Jebel Ali Free Zone Authority
• Dubai Healthcare City Authority
• Meydan

Abu Dhabi

• MASDAR City
• Abu Dhabi Global Market
• Abu Dhabi Ports
• Abu Dhabi Airports Free Zone

Sharjah

• Sharjah Healthcare City
• Sharjah Airport International Free Zone Authority
• Sharjah Media City
• Sharjah Research Technology and Innovation Park
• Hamriyah Free Zone Authority
• Sharjah Publishing City

Fujairah

• International Free Zone Authority
• Fujairah Free Zone
• Fujairah Creative City

Ras Al Khaimah

• RAK International Corporate Centre
• Ras Al Khaimah Economic Zone
• RAK Maritime City

Ajman

• Ajman Free Zone Authority
• Ajman Media Free Zone Authority

Um Al-Quwain

• UAQ Free Trade Zone

The Cabinet Resolution 57 of 2020 appoints the Federal Tax Authority (FTA) as the National Assessing Authority. As per this role, the FTA is required to perform the following functions:

• Assess the eligibility of businesses for compliance with ESR Regulations
• Check whether a licensee or exempted licensee complies with the Economic Substance Test
• Carry out the reporting requirements
• Enforce penalties on companies that do not comply with the relevant ESR requirements
• Listen and decide on the appeals
• Exercise any other duties or rights under the ESR Regulations

There are various regulatory authorities under the ESR Regulations for every jurisdiction and free zone. For every relevant activity, there is a regulator, a free zone authority, and a financial free zone authority. Each of them has to perform the following responsibilities:

• Collect the ESR-specific documents from the applicable businesses that include ESR Notification, Economic Substance Report, and other supporting documents
• Check the documents submitted by businesses for completeness, accuracy, and compliance with necessary guidelines
• Assess the information, data, and documents submitted by Exempted Licensees showing their eligibility for applicable exemption as per the Cabinet Resolution on ESR and check their sufficiency as well
• Submit Economic Substance Reports and Notifications of businesses, provide information related to the implementation of ESR Regulations, and notify the National Assessing Authority (FTA) regarding anything related to Economic Substance Regulation within 30 days of receiving the same
• Carry out any other activities or tasks relevant to implementing the ESR Regulations

The Competent Authority of UAE is not required to submit any document, but they need to exchange information under the ESR Regulations. They must provide the following information to foreign competent authorities:

• Failure of a licensee to submit the Economic Substance Test
• A licensee’s status of a High-Risk IP Licensee
• A licensee’s claims of a tax resident in some other jurisdiction outside the UAE
• A claim by the branch of a foreign entity that it is subject to tax in some other jurisdiction outside the UAE

A Permanent Committee will be formed headed by a representative(s) of the Ministry of Finance. This committee will ensure the implementation of ESR requirements in the UAE. Its key activities include:

• Ensure effective implementation of the tasks of regulatory authorities, make sure that they coordinate, and try to standardize their procedures to make processes easier.
• Improve the communication and coordination between the Regulatory Authorities, National Assessment Authority, and itself to make the functions more efficient.
• Identify the challenges that Regulatory Authorities face while executing tasks related to the implementation of ESR Regulations and recommend feasible solutions to address them.

If a licensee or exempted licensee fails to submit the notification, it has to pay a penalty of AED20,000.0. In the case of failure to submit the report, the penalty amount is AED50,000.0. The penalty amount is AED50,000.0 for failure to comply with the Economic Substance Test for each financial year.

If the entity fails to submit the report or fails to meet the test for the second consecutive year, an administrative penalty of AED400,000.0 is imposed. In the case of providing inaccurate information in the documents, the penalty amount is AED50,000.0.

In addition to administrative penalties, failure to comply with ESR Regulations can also result in sharing of this information by the National Assessing Authority with the foreign competent authorities. The competent authority may also take other actions such as suspending the entity’s operations, canceling the license, or not renewing the trade license or permit.

A juridical person (who is a corporate legal entity with a legal identity separate from its owners) and an unincorporated partnership firm (partnership operating in the UAE without the formation of a separate legal body) would be construed as “Licensee” and subjected to ESR in UAE.

ESR Notification is a regulatory requirement for any legal organization having its presence is multiple countries (including UAE) and whose income from Relevant Activities are not being taxed in any other country.

Ministry of Finance’s ESR Portal allows the modification of the already submitted ESR notification. The Licensee Dashboard’s page provides for a button “Request for amendment” to proceed with changes in the ESR notification filed earlier.

No, Head Office of the entity shall file a single consolidated ESR notification for all the branches in UAE together.

ESR Report and Notification are filed online through Ministry of Finance’s ESR Portal.

ESR Notification is to be filed by the Licensee giving details about Licensee and the nature of activities conducted during the reporting period. ESR Notification is prerequisite to filing of ESR Report.

ESR Report aims to capture the details about the Licensee’s business operations around Relevant Activities and corresponding income/expenses, assets, employees and governance structure.

If you are facing any technical glitch while accessing or using Economic Substance Regulations Portal, such as issues in submitting an ESR notification or the submitted notification not appearing on the dashboard, then you can write down to – ESRsupport@cbrain.com  

Only the regulatory authority can close the duplicate requests. Thus, to cancel the duplicate submission of the ESR notification of report, you need to contact the relevant regulatory authority and request to cancel the duplicate request. 

For amending any already submitted ESR Notification or ESR Report, you need to contact your regulatory authority. 

You can find out your Regulatory Authority’s contact person on the website of the Ministry of Finance, UAE under the Economic Substance Regulations page >> “M. Contact Points for Inquiries of Real Economic Activities” https://www.mof.gov.ae/en/strategicpartnerships/pages/esr.aspx