Economic Substance Regulation (ESR)

What is Economic Substance Regulation (ESR)?

The Economic Substance Regulations (ESR) is a set of regulations introduced by the UAE in 2019 to demonstrate that they have a substantial economic presence

in the country by conducting real economic activities and maintaining adequate levels of staffing, expenditure, and physical presence. The ESR applies to companies that are registered in the UAE, as well as foreign companies that carry out relevant activities within the UAE. The relevant activities include banking, insurance, investment fund management, leasing, headquarters, shipping, and intellectual property.

Purpose of Economic Substance Regulations (ESR) UAE

The purpose of the ESR is to prevent businesses, typically multinational corporations, from artificially shifting profits to jurisdictions that

impose little or no income tax without having substantial activities in that jurisdiction to take advantage of their tax laws. The UAE is considered one of these jurisdictions.

Relevant Activities

Entities that conduct one or more of the stated activities will be subject to ESR:
Banks
Insurance
Investment Fund Management

Shipping
Lease-Finance
Headquarters
Holding Companies
Distribution and Service Centers
Intellectual Property
A ‘substance over form’ approach must be adopted when determining whether an entity is carrying out any of the Relevant Activities. The assessment is required to be made for individual UAE entities. There is no applicable minimum income threshold.

ESR compliance obligations

UAE entities that conduct any one or more of the Relevant Activities must file a notification within six months of the end of the financial year (FY) on the Ministry

of Finance’s (MoF) online ESR portal. As part of this filing, entities must disclose which relevant activities were conducted, whether any income was earned therefrom and whether such income was subject to tax outside the UAE. In the case of a UAE entity with multiple UAE branches, only one consolidated notification is to be submitted.

UAE Economic Substance Regulations Reporting

Entities that have earned income from any Relevant Activity(ies) must file a report on the MoF’s online ESR portal within twelve (12) months of the end of the

relevant FY. As part of this filing, entities are required to disclose various details, including:
Whether or not they have met the ES Tests
Details of outsourced service provider(s) (if applicable)
Details of specific CIGAs conducted
Operating expenditure and number of full-time employees for each Relevant Activity
Details of the parent, ultimate parent, and ultimate beneficial owner

Economic Substance Regulation (ESR)