Economic Substance Regulations (ESR) in the UAE were introduced in April 2019. We are offering ESR Notification and ESR filing services. ESR effectively imposes a requirement for UAE entities (including offshore companies and branches of local and foreign companies) that carry out and earn income from any of the Relevant Activities to maintain economic substance regulations in the UAE specific to each Relevant Activity. Annual filing requirements must be met or organizations risk penalties for non-compliance.

Purpose of Economic Substance Regulations (ESR) UAE

The purpose of the ESR is to prevent businesses, typically multinational corporations, from artificially shifting profits to jurisdictions that impose little or no income tax without having substantial activities in that jurisdiction to take advantage of their tax laws. The UAE is considered one of these jurisdictions.

Accordingly, the Economic Substance Regulations (ESR) impose an obligation on all entities that carry geographically mobile business activities to annually submit a comprehensive report to the authorities. The aim of this is to demonstrate that these businesses have substance and legitimate operations in the UAE. The first filing season, in relation to FY19, was completed by the end of 2020. Businesses should now be looking at the second filing season

Relevant Activities

Entities that conduct one or more of the stated activities will be subject to ESR:

        • Banks
        • Insurance
        • Investment Fund Management
        • Shipping
        • Lease-Finance
        • Headquarters
        • Holding Companies
        • Distribution and Service Centers
        • Intellectual Property

 

A ‘substance over form’ approach must be adopted when determining whether an entity is carrying out any of the Relevant Activities. The assessment is required to be made for individual UAE entities. There is no applicable minimum income threshold.

ESR compliance obligations

ESR Notification

UAE entities that conduct any one or more of the Relevant Activities must file a notification within six months of the end of the financial year (FY) on the Ministry of Finance’s (MoF) online ESR portal. As part of this filing, entities must disclose which relevant activities were conducted, whether any income was earned therefrom and whether such income was subject to tax outside the UAE. In the case of a UAE entity with multiple UAE branches, only one consolidated notification is to be submitted.

Economic Substance Tests

UAE entities that have earned income from any Relevant Activity(ies) must demonstrate adequate substance in the UAE relating to such activity(ies) by satisfying the following three Economic Substance Tests (ES Tests):

        • Core Income Generating Activity (CIGA) test requiring the core activities to be performed in the UAE
        • Directed and Managed test requiring the business to be directed and managed from the UAE in relation to the Relevant Activity(ies); and
        • Adequacy test requiring adequate resources (employees, expenses and assets) in the UAE  

 

Holding companies are subject to reduced ES Tests whereas, High risk Intellectual Property businesses are subject to enhanced ES Tests. In determining whether an entity has adequate economic substance in the UAE, authorities are expected to consider the impact of Covid-19 (e.g. travel restrictions, which do not allow directors to travel to the UAE for board meetings) based on a notification issued by the MoF. However, the facts in each case should be carefully reviewed by businesses and documented along with considerations regarding the appointment of alternative directors. 

UAE Economic Substance Regulations Reporting

Entities that have earned income from any Relevant Activity(ies) must file a report on the MoF’s online ESR portal within the twelve (12) months of the end of the relevant FY. As part of this filing, entities are required to disclose various details, including:

        • Whether or not they have met the ES Tests
        • Details of outsourced service provider(s) (if applicable)
        • Details of specific CIGAs conducted
        • Operating expenditure and number of full-time employees for each Relevant Activity
        • Details of parent, ultimate parent and ultimate beneficial owner 

How BMS Auditing can help in ESR?

BMS Auditing can provide the following services with its large international tax team that has been extensively involved in advising clients on ESR matters:

        • Assessing whether the business activities conducted fall within any of the Relevant Activities and whether any exemption can be availed
        • Assistance in filing the notification
        • Assessing whether the Economic Substance Tests are met and advising on documentation to be maintained to support any future inquiries from the authorities
        • Assistance in filing the report, as well as any supporting documentation
        • Identify gaps between existing substance and the level of substance required under ESR and advise on remedial measures
        • Assistance in responding to inquiries from the regulatory authorities/FTA