Economic Substance Regulations (ESR) were introduced in the United Arab Emirates (UAE) to comply with international standards set by the Organization for Economic Cooperation and Development (OECD) and the European Union (EU). These rules aim to ensure that businesses operating in the UAE demonstrate economic substance and do not engage in harmful tax practices or artificial profit shifting.
In an effort to enforce these rules the UAE Ministry of Finance requires all companies engaged in relevant activities to file an Economic Substance Notification.
The relevant activities as per the ESR include:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Headquarter Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business (IP)
- Distribution and Service Center Business
How can I determine if my business falls under the scope of the ESR?
Regardless of whether you operate as a mainland or freezone company, you need to conduct an assessment of the Economic Substance Regulations (ESR) to determine if your business is subject to the relevant activities.
To conduct this assessment, follow these steps:
1. Understand the Relevant Activities: Here is a detailed description of each relevant activity under the ESR:
Banking Business:
- Accepting deposits and other repayable funds from the public.
- Granting credits or loans for one’s account.
- Carrying out and managing payment transactions.
Insurance Business:
- Carrying out contracts of insurance.
- Effecting contracts of insurance.
- Managing insurance business.
Investment Fund Management Business:
- Managing investments for individuals or entities.
- Managing portfolios of investments.
Lease-Finance Business:
- Lending assets to others under a finance lease.
- Financing such leases.
Headquarter Business:
- Providing or arranging for the provision of services to affiliates.
- Making decisions on behalf of affiliates.
- Incurring expenses on behalf of affiliates.
Shipping Business:
- Activities relating to transporting goods by sea.
- Rental on a charter basis of ships for the purpose of transporting goods or people.
Holding Company Business:
- Holding shares or equitable interests in other companies.
- Earning dividends, capital gains, and other incidental income from such holdings.
Intellectual Property Business (IP):
- Owning or managing IP assets.
- Making decisions on holding, exploiting, or granting rights to use IP assets.
- Earning income from the exploitation of IP assets.
Distribution and Service Center Business:
- Purchasing goods from foreign affiliates.
- Selling goods to foreign affiliates or customers.
- Providing services to foreign affiliates.
2. Review Relevant Income Streams: Understand where your revenue is generated and determine whether these income streams fall within the relevant activities.
3. Determine Economic Substance in the UAE: To establish genuine economic substance in the UAE, assess whether you maintain an adequate level of employees, physical assets, and management presence necessary to conduct the relevant activities.
4. Seek Advice from Theta7 Accountants.
What is the deadline for filing?
The deadline for submitting your Economic Substance notification follows the financial period of your company. You must file the notification within six months of your financial year-end.
For example:
If your year-end is December 31, 2024, you must file by June 30, 2025.
If you require assistance with your ESR assessment or filing the ESR Notification, please contact us.
