The United Arab Emirates (UAE) has been recognized as a global business hub, attracting a wide range of multinational corporations and investors. To maintain its reputation and foster transparency, the UAE introduced the Economic Substance Regulations (ESR) in 2019. The ESR aims to prevent companies from engaging in profit shifting and ensure that they conduct real business activities within the jurisdiction.

This comprehensive blog post will provide an in-depth understanding of the ESR provisions in the UAE, covering the key requirements, relevant activities, and reporting obligations. We will also discuss how Lemon Consultech can help businesses navigate these regulations and ensure compliance.

1. Background and Purpose of the ESR

The ESR was enacted to align the UAE’s tax framework with the international standards set by the Organisation for Economic Co-operation and Development (OECD) and the European Union (EU). By implementing the ESR, the UAE aims to:

• Address concerns about harmful tax practices
• Demonstrate economic substance
• Improve transparency and fairness in the global tax system
• Remove the UAE from the EU’s list of non-cooperative jurisdictions for tax purposes

2. Scope and Applicability

The ESR applies to all UAE onshore and free zone companies, including branches and representative offices, that conduct relevant activities. The following types of business activities are considered relevant under the ESR:

• Banking
• Insurance
• Investment fund management
• Lease finance
• Headquarters
• Shipping
• Holding company
• Intellectual property
• Distribution and service center

Excluded from the ESR are companies in which the UAE government holds a direct or indirect ownership stake of at least 51%.

3. Economic Substance Test

To demonstrate compliance with the ESR, companies must meet the Economic Substance Test (EST). The EST consists of three main criteria:

a. Core Income-Generating Activities (CIGA) – Companies must conduct substantial CIGA within the UAE related to their relevant activities.

b. Direction and Management – Companies must be directed and managed within the UAE, with an adequate number of qualified board members physically present in the UAE during board meetings.

c. Adequate Substance – Companies must have an adequate level of employees, expenditure, and physical assets within the UAE to support their relevant activities.

4. Reporting Obligations

Companies subject to the ESR must submit annual notifications and economic substance reports to the relevant regulatory authority, typically the UAE Ministry of Finance. The annual notification requires companies to provide basic information about their relevant activities, income, and whether they are claiming exemption from the ESR.

The economic substance report requires more detailed information, including:

• The type and amount of relevant income
• The amount and type of expenses incurred and assets held in relation to the relevant activity
• The location of the company’s CIGA
• The number of employees engaged in the relevant activity
• Information about the company’s management and decision-making processes

Companies that fail to meet the ESR requirements or provide inaccurate information may face penalties, ranging from AED 10,000 to AED 300,000.

5. Key Deadlines

The deadlines for submitting annual notifications and economic substance reports vary depending on the company’s financial year-end. Generally, companies must submit their annual notifications within six months after the end of their financial year, while economic substance reports must be submitted within 12 months after the end of their financial year.

6. How Lemon Consultech Can Help

Navigating the ESR requirements can be challenging, especially for businesses with multiple relevant activities or those operating in various jurisdictions. Lemon Consultech, a leading compliance consulting firm, can help your business meet the

UAE’s ESR obligations by providing tailored solutions and expert guidance. Our team of experienced professionals will assist you with:

a. ESR Assessment – We will review your business activities to determine whether they are classified as relevant under the ESR and identify any exemptions that may apply.

b. Economic Substance Test Preparation – Our team will work closely with you to ensure that your company meets the three criteria of the EST, including the implementation of appropriate measures to maintain adequate substance in the UAE.

c. Documentation and Reporting – We will assist in preparing and submitting the required annual notifications and economic substance reports to the relevant regulatory authority, ensuring accuracy and timeliness.

d. Ongoing Compliance Support – Lemon Consultech will provide continuous support to help your business stay compliant with the ESR as regulations evolve and your business grows.

e. Training and Awareness – Our team can deliver training sessions and workshops to educate your employees about the ESR requirements and their responsibilities in maintaining compliance.

 

Compliance with the Economic Substance Regulations is crucial for businesses operating in the UAE to avoid penalties and maintain a positive reputation. By understanding the ESR provisions and partnering with Lemon Consultech, you can ensure that your business meets all regulatory obligations while focusing on your core operations and growth. To learn more about how Lemon Consultech can assist your business with ESR compliance, contact us today.