WHAT IS ECONOMIC SUBSTANCE REGULATION (ESR)?

This is issued pursuant to Article 6. (6) of the Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance Regulation (“ESR”) to provide guidance on how the economic substance test may be met for the purpose of complying with the provisions of the ESR.

As per UAE ESR, every entity in the UAE is required to evaluate whether:

  • It is conducting any of the prescribed Relevant Activities under UAE ESR or not; and
  • In case where it is conducting one or more of the prescribed Relevant Activities, then whether the entity satisfies the UAE ESR requirements/tests or not.

WHO IS A LICENSEE?

Article (1) of the ESR defines a licensee as “any natural or judicial person licensed by the competent licensing authority in the UAE, to carry out a relevant activity in the UAE including a Free Zone and a Financial Free Zone”

A licensee is considered licensed by virtue of holding a license from relevant licensing authorities from which a licensing approval is required to carry out a relevant activity. A licensee includes a commercial license, certificate of incorporation, or other form of permit required to be procured prior to the licensee being able to carry out a relevant activity.

Every Licensee that carries on a relevant activity and derives an income therefrom in the UAE, including a free zone or a financial free zone must meet Economic Substance Test.

WHAT ARE THE RELEVANT ACTIVITIES?

EXEMPT COMPANIES

Companies in which the Federal Government or the Government of any Emirate of the UAE or any governmental authority or body of any of them which has at least 51% direct or indirect ownership in its shareholding are not subject to the ESR.

NON-COMPLIANCE PENALTIES

  • Penalties for failure to filing notification : AED 10,000 to AED 50,000
  • Penalties for failure to provide accurate or complete information: AED 10,000 to AED 50,000; and deemed failure to demonstrate economic substance in UAE
  • Demonstrate sufficient economic substance in the UAE for the relevant financial year
    • First year of failure: Penalty of AED 10,000 to AED 50,000; and information exchange with foreign competent authority of:
      • Parent Company
      • Ultimate Parent Company
      • Ultimate Beneficial Owner
    • Second consecutive year of failure: Information exchange (as above); and penalty of AED 10,000 to AED 300,000; and Commercial license could be suspended, withdrawn, or not renewed

    • OUR SERVICES

    Squarecut Consultancy offers end to end ESR filing services that help businesses to be compliant and avoid any penalties. We adopt a three stage methodology:

    ASSESS & EVALUATE

    • Understanding the nature of business to evaluate the impact of UAE ESR
    • Identifying if the business falls within the applicability of ESR

    GAP ANALYSIS

    • Collecting and analyzing organizational data
    • Identifying and highlighting gaps

    FILING

    • Offering assistance in notification filing
    • Assistance in reporting and compliance to ESR

    Reach out to us to know more about ESR and how we can help you with compliance.