The Economic Substance Regulation has been introduced in the UAE in April 2019 with the aim to curb harmful tax practices while at the same time complying with the global standards. It is a major step toward preventing businesses from unethically shifting their profits to jurisdictions that impose minimum or no income tax with the intention of taking advantage of their liberal tax regime.
In order to restrict this practice of profit sharing and to promote transparency, ESR laws impose an obligation on the businesses operating in UAE to have an adequate presence in the country. The regulation aims to demonstrate that these businesses have substance and legitimate operations in the UAE.
It applies to all UAE onshore as well as free zone legal entities that carry out one or more of the 9 ESR “Relevant Activities” referred to as “licensees”. These relevant activities include Banking, Distribution and service centre, Fund management, Headquarters, Holding company, Insurance, Intellectual property, Finance and leasing and Shipping.
ESR Filing Requirements
Entities that fall within the scope of the regulations have to file ESR Notification and submit ESR Reporting. The annual filing obligations for such entities are as follows:
| Relevant Activities | Income Earned | Notification | Reporting |
| No | No | Not required | Not required |
| Yes | No | Must be filed within 6 months from the end of the financial year declaring that the entity undertakes Relevant Activity. | Not required |
| Yes | Yes | Must be filed within 6 months from the end of the financial year declaring that the entity undertakes Relevant Activity. | Must be filed within 12 months from the end of the financial year declaring certain business information demonstrating economic substance. The information includes income figures, expenses, assets, number of employees, etc. |
Reporting Deadlines
Below are the reporting deadlines for a selection of financial year ends:
| Fiscal Year End | Notification Filing Deadline | Report Filing Deadline |
| 30 Jun 2021 | 31 Dec 2021 | 30 Jun 2022 |
| 30 Sept 2021 | 31 Mar 2022 | 30 Sept 2022 |
| 31 Dec 2021 | 30 Jun 2022 | 31 Dec 2022 |
| 31 Mar 2022 | 30 Sept 2022 | 31 Mar 2023 |
Penalty for Non-Compliance
In case of non-compliance with ESR regulations by the entities, Federal Tax Authority (FTA) can impose wide-ranging and significant penalties which are as follows:
| Offense | Penalty in 1st year | Penalty in the subsequent year |
| Failure to submit a Notification | AED 20,000 | AED 20,000 |
| Failure to submit an Economic Substance report | AED 20,000 | AED 20,000 |
| Failure to provide accurate or complete information | AED 50,000 | AED 50,000 |
| Failure to demonstrate sufficient economic substance in the UAE | AED 50,000 | AED 400,000 |
The penalty can be imposed anytime within six years from the date of such violation. In case of persistent non-compliance, the entity’s license can be suspended, revoked or not renewed.
Why Accurate Assessment of Activities is Important?
Accurate assessment of the relevant activities is very important because failure to do so can result in huge penalties. Therefore, it is crucial for entities to undertake assessments on a yearly basis.
How Can IMC Group Help?
IMC Group can help you in regards to complying with ESR requirements and assist in the filing of the ESR notifications and ESR reports in an efficient and professional manner. We can help you in the following ways:
- ESR Applicability Assessment
We conduct a detailed study of your business activities to assess the applicability of Economic substance regulations.
- ESR Notification Filing
We provide support and guidance in preparing your ESR Notification and filing it with the Ministry of Finance as a part of ESR compliance.
- ESR Report Filing
We provide support and guidance in preparing your ESR Report and submitting it as per the requirement of the Ministry of Finance.
- Economic Substance Regulations Test and Compliance
We can assist in undertaking Economic Substance Regulations impact assessment and gap analysis audit to identify the non-compliant aspects. We guide you and recommend corrective or preventive actions to fulfill the requirements of ESR.
- Submitting Appeal
We can assist you in submitting an appeal against the penalties that are already levied concerning ESR compliance.
- Accounting and Bookkeeping
Our team can help you maintain proper and up-to-date accounting records as per IFRS accounting principles ensuring relevant activities and associated income are easily identifiable and presentable to authorities as and when required.
Contact IMC Group and easily navigate through the Economic Substance Regulation and guidelines based on your jurisdiction. Book a consultation with our experts now!
