The next filing deadline under the UAE’s Economic Substance Regulation (ESR) is 30 June 2023. The ESR was introduced in 2019 as part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the EU Code of Conduct Group on Business Taxation. The ESR applies to all mainland and free zone legal entities carrying on “relevant activities,” which include banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding companies, intellectual property, and distribution and service centres. Entities that fall within the scope of the ESR must maintain evidence and demonstrate an adequate “economic presence” in the UAE with respect to the activities they undertake, as follows:
- The entity must conduct its core income generating activities (CIGA) in the UAE;
- The entity must be directed and managed in the UAE, e.g., board meetings must be held and/or resolutions passed in the UAE; and
- The entity’s activities must be carried out with adequate local “economic substance” with regard to the level of relevant activity in the UAE, which can be demonstrated by showing an adequate number of full-time employees, operating expenditure and physical assets.
Entities that fall within the scope of the ESR have two annual filing obligations, with penalties applying for failure to comply (for prior coverage, see the tax alert dated 17 March 2022):
- An ESR notification must be filed if the business is undertaking a relevant activity, regardless of whether the business claims an exemption from ESR or does not earn any income from the relevant activity.
- An ESR report must be filed by a business that engages in relevant activities, earns income from these activities and does not qualify for any exemption under ESR.
ESR notification and reporting are two separate filings. The annual notification must be submitted regardless of whether the entity has carried out a relevant activity (and/or regardless of whether the entity generated income from the activity), and an ESR report must be submitted within 12 months from the end of the financial year. An entity is exempt from the reporting obligation for any financial period in which it has not earned income from a relevant activity or if it fulfils the conditions for being exempt, but the notification form must be submitted if the entity is carrying on a relevant activity.
The deadlines for reporting are as follows:
We have noticed an increase in reviews by the licensing authorities and instances where the Federal Tax Authority is requesting additional documents in relation to the ESR tests.
BDO in United Arab Emirates
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