Economic Substance Regulations (ESR)

Economic Substance Regulations (ESR)

History

The UAE introduced Economic Substance Regulations pursuant to Cabinet of Ministers Resolution No.31 of 2019 (“Regulations”) on 30 April 2019. Guidance on the application of the Regulations was issued on 11 September 2019 pursuant to Ministerial Decision No. 215 of 2019

Applicability

The Regulations require companies and other business forms registered in the UAE that carry on one or more “Relevant Activities” (together, “Relevant Activities”), to have economic substance in the UAE in relation to these activities, and to comply with notification and return filing obligations. Such businesses are referred to in the Regulations and this document as “Licensees”. To support UAE businesses in understanding the scope and application of the Regulations, this document provides additional guidance on the “Relevant Activities” and their associated “Core Income-Generating Activities” (“CIGAs”).

Why ESR in UAE

If any business is conducted in the UAE, there should be an economic effect & substantial purpose in the UAE itself. For the transactions what is happening in the UAE should have real worth and actual existence in the UAE itself. So that ESR will ensure the substantial power and economic effect in the UAE.

Who need to comply?

Any natural or juridical person licensed by the competent licensing authorities in the UAE, to carry out a Relevant Activity in the UAE including a Free Zone and a Financial Free Zone

Exemption

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

Relevant Activity

The Regulations apply to companies and other business forms registered in the UAE, including in a Free Zone or in a Financial Free Zone, that carry out any of the following Relevant Activities.

  • Banking Businesses
  • Insurance Businesses
  • Investment Fund Management Businesses
  • Lease-Finance Businesses
  • Headquarters Businesses
  • Shipping Businesses
  • Holding Company Businesses
  • Intellectual Property Businesses
  • Distribution and Service Centre Businesses
Relevant Regulatory Authorities
  • Insurance Authority
  • Ministry of Economy
  • Securities and Commodities Authority
  • UAE Central Bank
  • The competent authority in the Free Zone and Financial Free zone for the relevant activity
How they might affect you and your business
  • Management structure
  • Income generation
  • Staffing and office space
  • Reporting responsibilities
Penalty
  • Failure to provide information / furnish notification : AED 10,000 – AED 50,000
  • Failure to meet economic substance test (1st Year): AED 10,000 – AED 50,000 and Information exchange with foreign competent authority of parent company, ultimate parent company and ultimately beneficial owner
  • Failure to meet economic substance test (Subsequent Year): AED 100,000 – AED 300,000 and Information exchange with foreign competent authority of parent company, ultimate parent company and ultimately beneficial owner & License may be suspended or withdrawn or cancelled.
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