Economic Substance Regulations in the UAE 2024: Key Insights and Deadlines

Economic Substance Regulations (ESR) in the UAE require entities engaged in specified activities to submit annual notifications and reports, with strict penalties for non-compliance. Businesses must assess and ensure adherence to ESR requirements, including the economic substance test, and maintain thorough documentation to meet audit demands. The ESR notification deadline applicable for the financial year ending December 31, 2023 is June 30, 2024.

By Giulia Interesse

In 2019, the United Arab Emirates (UAE) implemented the Economic Substance Regulations (ESR) to curb tax evasion by multinational corporations and enhance financial transparency. These regulations are applicable to all legal entities, including those on the UAE mainland, offshore, and in free zones, that engage in specified relevant activities. Such businesses are required to submit an ESR Notification and Report annually to the relevant authority.

Non-compliance with ESR requirements in the UAE can result in significant administrative penalties, making it crucial for businesses to diligently monitor and adhere to the ESR deadlines to avoid these penalties and other repercussions.

In this article, we provide an overview of the primary ESR requirements and highlights key upcoming deadlines.

Understanding ESR compliance and its applicability in the UAE

ESR compliance in the UAE involves adhering to regulations designed to prevent tax evasion and promote transparency among businesses. These rules apply to companies and entities that engage in specific activities, including:

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

Companies must first determine whether they have conducted any of these relevant activities during the financial year (FY). If so, they must comply with ESR requirements, which include:

• ESR Notification;
• Economic Substance Test; and
• Economic Substance Report.

Economic Substance Report

The primary purpose of the Economic Substance Report is for entities conducting relevant activities in the UAE to provide detailed information to the Ministry of Finance regarding their income, expenditure, assets, employees, and governance related to these activities.

This report must be submitted annually within 12 months following the end of the entity’s financial year. Entities engaging in any relevant activity that generates revenue must demonstrate compliance with the Economic Substance Test through this report, unless exempt. However, if an entity conducts a relevant activity but does not earn any income from it during the reportable period, it is not required to meet the Economic Substance Test or submit the report for that period.

The Economic Substance Report report requires disclosure of information similar to that in the ESR Notification but includes additional details on financial performance, such as:

• Total revenue;
• Accounting profit or loss; and
• A breakdown of financial statements for the reportable period.

Additionally, entities must submit a copy of their audited financial accounts for the relevant period.

Economic Substance Notification

The Ministry of Finance requires licensees to file an annual Economic Substance Notification if they engage in one or more relevant activities. This Notification confirms whether the licensee conducted any relevant activities and whether income was generated from these activities during the reported period. It must be submitted within six months following the end of the licensee’s financial year.

Even if a licensee qualifies for one of the exemptions under the ESR, they must still submit a Notification if they undertake any relevant activities. This ensures that the Ministry of Finance is fully aware of the scope and income of all relevant activities conducted by licensees in the UAE.

Exemption from ESR Report

Certain entities are exempt from filing an ESR Report but must still submit an ESR Notification. These exempt categories include:

• Entities entirely owned by UAE nationals or UAE residents, not part of a multinational enterprise group, and operating solely within the UAE;
• Investment funds;
• Special purpose vehicles or investment holding companies of investment funds;
• Entities that are tax residents in jurisdictions outside the UAE; and
• Branches of foreign companies, provided the branch’s income is subject to tax in the jurisdiction of the parent company.

ESR notification and reporting deadlines

The table below outlines the 2024 deadlines for ESR Notification and Report submissions in the UAE.

Penalties for non-compliance

Entities that do not submit an ESR Notification will face an administrative penalty of AED 20,000 (approx. US$5,445). Additionally, there is a penalty of AED 50,000 (approx. US$13,613) for failing to submit either the ESR Notification or Report.

Key considerations before the end of the financial year

Legal entities in the UAE must take several actions before their financial year end to ensure compliance with the ESR. Firstly, entities should assess whether they conducted and generated income from any of the relevant activities during the period. This assessment is critical to determine the ESR compliance requirements for the FY.

Next, if income was earned from those specific activities, entities need to review their adherence to the applicable ESR tests, which include:

• Directed and managed test;
• Core income generating activities (CIGA) test; and
• Adequacy test.

Identifying and addressing any potential areas of non-compliance before the financial year ends is essential to ensure full compliance with these ESR tests.

Additionally, entities should ensure that they can demonstrate control and supervision over any outsourcing arrangements in relation to the CIGA test. This can be achieved through clear contractual agreements or documented correspondence.

Finally, it is important for entities to gather and maintain relevant supporting documents related to their ESR compliance obligations. In the event of an audit by the Federal Tax Authority, licensees must be prepared to provide all requested documentation within a short turnaround period of five working days, demonstrating that they have met the ESR tests.

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