What is ESR ?
As part of the UAE’s commitment being a member of the OECD Inclusive Framework, in response to an assessment of the UAE’s tax framework by the European Union (“EU”) Code of Conduct Group on Business Taxation, the UAE introduced a Regulation on the Economic Substance (Cabinet of Ministers Resolution No.31 of 2019, the “Regulations”) on 30 April 2019.
Who is subject to the ESR Filling?
All UAE onshore, offshore and free zone companies that carry on and generate income from one of these activities:
- Banking
- Insurance
- Investment fund management
- Lease-finance
- Headquarters
- Shipping
- Holding company
- Intellectual property
- Distribution and service centres
ESR notification is an annual requirement. The notification must be submitted within 6 months from the end of the company's financial year. For companies with a financial year ending December 31, the deadline falls on June 30 of the following year. For companies with different financial year ends, the deadline shifts accordingly. Submissions are made through the Ministry of Economy's dedicated ESR portal or through the relevant free zone authority portal depending on your licence type.
How to Determine If Your Company Needs to File ESR?
Not every UAE business is required to submit a full ESR report, but most entities must at least assess their obligation. The requirement depends on two key factors: whether your company carries out a relevant activity and whether it earns income from that activity during the financial year.
If your business is engaged in any of the listed relevant activities, you are generally required to submit an ESR notification annually. However, a full ESR report is only necessary if your company generates income from those activities.
Even companies with no income may still need to file a notification to confirm their status. Because of this, it is important for businesses to review their activities carefully each year and ensure they meet the required compliance obligations.
Scope of ESR
It applies to all companies established in the UAE (except those entities in which a minimum 51 per cent direct or indirect investment is from government authorities) and which have an income from a relevant sector in any accounting period commencing on or after January 1, 2019.
UAE companies - offshore, onshore or mainland - should notify the concerned regulator on or before the due date issued by their applicable regulator. All mainland companies have to notify the Ministry of Economy before June 30, 2020.
Penalities
Penalties for failing to notify the Regulatory Authority within the given deadline is between AED10,000 and AED50,000. Other penalties shall apply in case Licensees fail to provide accurate or complete information and demonstrate sufficient economic substance in the UAE.
What Happens After You Submit Your ESR Notification?
Submitting the ESR notification is not the end of the compliance process — it is the beginning. Once the notification is filed, the regulatory authority reviews whether your company is required to submit a full ESR report based on the activities and income declared. If a report is required, it must be submitted within 12 months from the end of the relevant financial year, including details of employees, operating expenditure, and physical assets in the UAE. The regulatory authority may also request additional information or documentation to verify that genuine economic substance exists within the country. Companies that fail to demonstrate adequate substance after filing are subject to further penalties and potential exchange of information with foreign tax authorities. This makes post-notification compliance equally as important as the initial filing itself.
How Danburite can assist you with ESR ?
- To analyze the company structure & identify the entities qualify for ESR as per the business activities.
- To perform an assessment on the current compliance level of the company as per the ESR.
- To review the transactions of company to identify the outsourced activities.
- To conduct ESR test on the company & prepare the information for ESR reporting.
- To share the knowledge on ESR requirement with the concerned person in the organization & prepare compliance checklist.
- Assistance in submission of the notification information & ESR report with the Regulatory Authority.
Conclusion
Economic Substance Regulations (ESR) play a crucial role in ensuring that businesses operating in the UAE maintain genuine economic activities within the country. Introduced as part of the UAE’s commitment to global tax standards and transparency, ESR requires companies engaged in relevant activities to demonstrate adequate substance, proper reporting, and regulatory compliance.
Failure to comply with ESR requirements can result in significant penalties and legal complications. Therefore, businesses must carefully assess their obligations, maintain accurate records, and submit timely notifications and reports. With the right professional guidance, companies can ensure full compliance with ESR while avoiding risks and operating smoothly within the UAE’s regulatory framework.
FAQs
1. What are “relevant activities” under ESR in the UAE?
Relevant activities include sectors such as banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding company, intellectual property, and distribution and service centres.
2. Is ESR applicable to companies that do not generate income?
If a company does not earn income from relevant activities during a financial year, it may still need to submit an ESR notification, but it may not be required to file a full ESR report.
3. When should ESR notification and reporting be submitted?
ESR notification is generally submitted annually within the specified deadline set by the regulatory authority, while the ESR report must be submitted within 12 months from the end of the financial year.
