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Economic Substance Regulations (ESR) In the UAE
ESR Registration In UAE
Economic Substance Regulations (ESR) in the United Arab Emirates (UAE) were introduced as part of the UAE’s commitment to the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS). These regulations aim to ensure that businesses operating in the UAE, whether onshore, in Free Zones, or offshore, have a genuine economic presence and are not using the country solely for tax avoidance purposes.
Objective of ESR in UAE:
The primary goal of ESR UAE is to protect the reputation of the UAE and its entities by ensuring that income generated from Relevant Activities has real economic substance in the country. It aims to demonstrate that the incorporation of businesses in the UAE is not motivated solely by taking advantage of the UAE’s favourable tax regime.
Key Components of ESR in Dubai, UAE
Based on three essential pillars that companies or licensees must fulfil to meet the Economic Substance Regulations/Test criteria for any Relevant Activity following are the key components:
Core Income Generating Activity (CIGA):
The activities related to the Relevant Activity covered by Economic Substance Regulations must have their Core Income Generating Activity (CIGA) carried out within the UAE. In other words, the key revenue-generating activities associated with the business should take place in the UAE.
Direction and Control:
The licensee or company must be directed and controlled from within the UAE. This means that strategic decisions and management control should be exercised within the UAE, emphasizing substantial management presence in the country.
Economic Substance:
The licensee’s activities must demonstrate adequate local “Economic Substance” in relation to the level of Relevant Activity in the UAE. Economic Substance comprises:
- Full-time employees: The business should have an appropriate number of full-time employees based in the UAE who are engaged in the Relevant Activity.
- Expenditure: There should be sufficient expenditure incurred in the UAE related to the Relevant Activity.
- Premises: The company should have suitable physical premises in the UAE necessary for conducting the Relevant Activity.
ESR Compliance Process in UAE
Review and Assessment
A review of the company’s group structure and activities conducted to determine the applicability.
Compliance Evaluation
The company’s activities evaluated against ESR requirements to identify any gaps in compliance.
Corrective Actions
Based on the evaluation, corrective actions may be recommended and implemented to align with ESR.
Policy Establishment
ESR compliant policies and procedures then established to support ongoing compliance.
Notification and Reporting
Assistance then provided in filing the necessary notifications and reports to relevant authorities regarding compliance .
Training
Companies may offer training on Economic Substance regulations and policies to ensure that employees and stakeholders understand and adhere to the requirements.
In summary, the Economic Substance Regulations (ESR) in the UAE designed to ensure that businesses operating in the country have a genuine economic presence and are not using the UAE solely for tax avoidance purposes. Compliance with ESR UAE involves meeting specific criteria related to CIGA, direction and control, and economic substance, as well as a structured compliance process to maintain adherence to these regulations.