UAE
UAE
The UAE has implemented the Economic Substance Requirement (ESR) regulation to address Base Erosion and Profit Shifting (BEPS), which aims to combat harmful tax practices. The regulation applies to Mainland and Free Zone companies in the UAE, unless exempted, that engage in "Relevant Activity." Such companies are required to submit an ESR Notification and ESR Report on the Ministry of Finance portal within the specified deadlines.
The ESR regulation targets multinational companies that exploit the zero-tax rate applicable to UAE entities by engaging in profit-shifting transactions. To comply with the ESR, companies must accurately evaluate their business activities beyond those listed in their business license. They must determine if they are involved in any "Relevant Activity" and demonstrate "economic substance" in the UAE, meaning they must exhibit legitimate business operations for carrying out the identified Relevant Activity.
The ESR compliance is evaluated based on three criteria:
Since its introduction in April 2019, the ESR has been a significant regulatory focus for UAE authorities. The Federal Tax Authority has been designated as the national assessment authority responsible for enforcing the regulation. However, due to its relatively recent implementation, many companies face challenges in understanding and adhering to the ESR requirements.
At A V Savla, our experienced legal team assists clients with ESR compliance by:
Who are the Regulatory Authorities?
Federal Entities or Regulatory Authorities
What are the Relevant Activities?
The Relevant Activities as per the Economic Substance Regulations UAE are businesses which engage in the following activities:
UAE businesses which work in the sectors mentioned above must apply Substance over Forms to assess ESR eligibility, considering all activities in a financial year. Passive income from finance leases is also subject to ESR, and businesses with multiple relevant activities must demonstrate economic substance, with potential consolidation of ancillary activities in Dubai to prevent duplicate reporting.
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