ESR UAE: Economic Substance Regulations in the UAE

Economic Substance Regulations in Dubai, UAE

The UAE prides itself on being a fair, open, and easy place to do business in. To maintain this reputation, it’s important that regulatory bodies from major trade partners such as the EU and US share this assessment of our country.

In 2019, the UAE signed up to a new set of Economic Service Regulations (ESR) to ensure this is the case. The ESR gives all businesses trading in the UAE a clear set of guidelines to follow with regard to accounting, paper trails, ownership, and more.        

If you are currently trading, or intending to trade in the UAE, and are in an industry covered by the new ESR conditions, it is essential that you are compliant. Here is a detailed overview of the new regulations and what they could mean for your business to help you stay that way.

What is ESR in the UAE?

ESR in the UAE is a set of rules stipulating how businesses operating out here must conduct themselves. In essence, it outlines the correct way to record, track, and report economic activities carried out in the UAE.

Most importantly, it requires UAE onshore and free zone companies, including branches and subsidiaries, to maintain and demonstrate an “adequate economic presence” in the UAE relative to the activities they undertake. This is known as the Economic Substance Test.  

Companies can pass this test and prove their economic presence in a number of ways. This could be by performing the core of their revenue-generating activities in the UAE, by virtue of being managed by directors and shareholders who are physically present in the UAE, or by having a reasonable number of employees operating within the UAE.

There is no minimum standard for what is considered “adequate economic substance”, as this will vary depending on the nature and size of your company. Instead, authorities take a pragmatic approach, assessing whether conditions for the Economic Substance Test have been met, in the context of the business and its individual circumstances.

Who does ESR affect?

ESR does not apply to all businesses in the UAE. Your business activities will determine whether you are required to comply with the regulation. If you have undertaken any of the following activities within your previous business year, you will usually be required to submit an ESR notification:

  • Banking Business
  • Insurance Business
  • Investment Fund Management Business
  • Lease – Finance Business
  • Headquarters Business​​
  • Shipping Business
  • Holding Company Business
  • Intellectual Property Business (“IP”)
  • Distribution and Service Centre Business​

What is ESR compliance?

Compliance with ESR is two-fold. Firstly, if you undertake any of the activities listed above, you must be able to demonstrate a significant economic presence within the UAE. But this is not all. You are also required to file a return to your licensing authority attesting to that fact.

Failure to comply with either of these conditions can lead to fines ranging from AED 10,000 to AED 50,000 in the first instance. Repeat offenders could land fines up to AED 300,000. There are several other possible sanctions, as detailed on the UAE Ministry of Finance website:

“Failure to comply with the Regulations can result in penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), as well as other administrative sanctions such as the suspension, revocation or non-renewal of the entity’s trade license or permit.”

What is an ESR submission?

Your ESR submission is known as a Notification and must be filed with your licensing authority. It should contain details about your business activities within the UAE.

As well as listing any relevant activities undertaken within the last financial year, you must also provide information regarding the tax residency of the licensee, and other details on income, revenues, and business ownership.

Your Notification must state the value of any income earned from relevant activities, as well as the number of employees within the UAE along with details of their roles and responsibilities. You must also sign the document stating that you have met ESR to the best of your knowledge.

It is important to note that you must file a return if you have carried out any relevant activities, regardless of whether these activities have generated an income in the UAE.

Notifications must be filed within six months of the licensee’s financial year-end.

As ESR compliance is of such importance, it is always a good idea to file your Notification with the help of a UAE company expert.

Stay ESR compliant with Trade License Zone

Ensuring and proving ESR compliance can be complex, especially to those that are new to the process.

That’s why it’s always advisable to work with a UAE company expert such as Trade License Zone. As well as assisting with compliance, we can also help with a host of other business services, from company setup through to ongoing value-added support.

If you are yet to start your business, we can also help you find the most suitable license and setup type for your activities, based on your needs and your budget. We’ll even manage your license and visa applications on your behalf.  

When you use our business setup service, you also gain peace of mind that your license and visa applications are free from errors and omissions – both of which can lead to delays and rejection.

When you work with a company formation specialist, all you need to provide is some basic documentation and a little information about the nature of your business. Then, sit back and let the experts take care of the rest – managing your license and visa applications, communicating with all relevant departments and authorities, and reporting back when you’re ready to start trading. It really is that simple.