Ways of Filing ESR Notifications & Reports? FAQs on ESR
ESR(Economic Substance Regulation) is a compliance requirement for all kinds of businesses registered in the UAE. Cabinet Resolution no. 31/2019 was initially enacted by The United Arab Emirates (UAE) Ministry with effect from 30th April 2019 in the UAE. After this, a Ministerial Decision 215 was implemented for the year 2019 which gave directives for the implementation of the provisions of Cabinet Decision no. 31/2019. However, a new Economic Substance Regulation On 10th August 2020 was introduced in UAE via Cabinet Resolution 57/2020 which repealed and revoked Cabinet Decision no. 31/2019. Also, Ministerial Decision 215 for the year 2019 was replaced by Ministerial Decision No 100 for the year 2020.
So, the businesses will now have to comply with Cabinet resolution 57/2020 & Ministerial Decision 100 for the year 2020 giving directives for the implementation of the provisions of Cabinet Decision no. 57/2020.
ESR Notification
The offshore companies and businesses that hold a trade license in the UAE must notify the regulatory authorities whether they are carrying out relevant activities in the UAE or not. The free zone companies have to file and submit the ESR Notification to the concerned free zone authorities while the mainland companies have to notify the Ministry of Economy regarding the relevant activities they are carrying out. The Ministry of Economy and free zone authorities collectively announce the deadlines for submitting the Economic Substance Notification in the UAE. As the ESR Notification in the UAE is a mandatory requirement which all businesses must comply with.
How to file ESR notification in UAE ?
ESR Regulations make it mandatory for the mainland, free zones and offshore companies to self-assess their respective activities and file the ESR notification annually to their relevant regulatory authority. For filling ESR Notification companies must fulfill the criteria:
- The companies filling ESR Notifications must carry out the relevant activity in the UAE
- The company’s earnings must be subject to tax outside the UAE
- Date of the financial year-end
You can learn how to file ESR in UAE? here
Some relevant activities as per ESR in UAE:
Most of the companies in the UAE including the mainland, free zone offshore, and the financial free zones come under the scope of the Economic Substance Regulations in UAE. The companies need to comply with Economic Substance Regulations in UAE if they generate earnings from any of the relevant activities given below:
- Banking Businesses
- Insurance Businesses
- Investment Fund Management Businesses
- Lease-Finance Businesses
- Headquarter Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Distribution and Service Centre Businesses
Some FAQs based on ESR has been answered below:
Who is subject to ESR regulation?
Any licensee carrying out any of the following relevant activity must comply with ESR regulation:
- Banking Businesses
- Insurance Businesses
- Investment Fund Management Businesses
- Lease-Finance Businesses
- Headquarter Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Distribution and Service center Businesses
Are branches subject to the Regulations?
If Branches registered in the UAE are an extension of their “parent" or “head office" and do not have separate legal personalities. In this case, the parent company must file a single Licensee, reporting their Relevant Activities and all its branches in one composite Notification and/or Economic Substance Report. A company from a foreign country having a branch in the UAE and carries out a Relevant Activity would be required to comply with the Regulations as a single entity unless the Relevant Income of the branch is within the scope of taxation in the jurisdiction of the foreign parent/head office. When a UAE entity carries on a Relevant Activity through a branch registered outside the UAE, the UAE entity is not required to consolidate the activities and income of the foreign branch for purposes of the Regulations, provided the Relevant Income of the foreign branch is subject to tax in the foreign jurisdiction where the branch is located.
Do the activities listed on the commercial license determine whether a Licensee undertakes a Relevant Activity?
No. the activities listed on the commercial license do not determine whether a Licensee undertakes a Relevant Activity. A 'substance over form approach must be used to determine whether a Licensee undertakes a Relevant Activity and is within the scope of the Regulations or not.
Who all are exempted from the Economic Substance Regulations?
The following Licensees are exempted from filing an Economic Substance Report and the requirement to demonstrate substance in the UAE:
- A Licensee that is tax resident outside the UAE;
- An investment fund and its underlying SPVs / investment holding entities;
- A wholly UAE resident-owned business that is not part of a multinational group and that only carries on business in the UAE;
- A branch of a foreign entity that is subject to tax on all of its Relevant Income in a foreign jurisdiction.
Sufficient evidence must be submitted along with the Notification form to claim any of the above exemptions. Please refer to Ministerial Decision 100 for more information.
What is “appropriate” or “adequate” economic substance?
- In the UAE businesses are acknowledge based on their size and nature. And adequate and appropriate will depend on the nature and level of activities carried out by the businesses, and the income earned by the Licensee. Therefore, the regulation does not provide a “minimum" standard for “adequate" or “appropriate" economic substance.
Is it required for a Licensee to hold board meetings in the UAE?
Yes, a Licensee must hold board meetings in the UAE for an adequate number of. The adequate number depends upon the type of relevant activity carried out by the entity. But for each board meeting held in the UAE:
- A quorum of directors must be physically present in the UAE; and
- Minutes of the meeting must be maintained and signed in the UAE; and
- Directors attending the board meeting must have the necessary skills and expertise to discharge their fiduciary duties.
A Holding Company Business is not required to be directed and managed in the UAE, except where this is a requirement of the relevant licensing authority.
When should a new company or just a few months file the ESR Notification, if they undertake a relevant activity?
- ESR Notifications needs to be filed within six months from the end of the relevant financial period; and
- Economic Substance Reports need to be filed within 12 months from the end of the relevant financial period.
Will the Regulatory Authorities tell businesses if they are subject to the Regulations?
No, businesses must self-assess themselves whether they are undertaking a relevant activity or not. Thye must not rely on Regulatory authorities to inform them the same. An entity can refer to Schedule 1 of Ministerial Decision 100 for an explanation and examples of each Relevant Activity.
What is minimum income fixed to apply for Economic Substance Regulations?
There is no minimum income fixed for applying to Economic Substance Regulations. It’s just that if an entity carries out a Relevant Activity, they must submit the ESR Notification. This is also applicable if you don’t earn single money from the relevant activity, in that case, as well you have to file the notification.
Who needs to submit a Notification and by when?
Exempted Licensees and Licensees who undertake any kind of Relevant Activity irrespective of any income earned from the Relevant Activity during the financial period are required to file a Notification within six months from the end of the relevant financial period. All Notifications must be submitted on the Ministry of Finance filing portal.
Who has to file an Economic Substance Report and by when?
Only Licensees that earn income from a Relevant Activity during the relevant financial period and are not exempted from the Regulations are required to show economic substance in the UAE and file an Economic Substance Report. Economic Substance Reports need to be strictly filed within 12 months from the end of the relevant financial period.
Is it necessary to file a Notification even if I have not earned any income during the financial period?
Yes, any Business that carries out a Relevant Activity during a financial period is required to submit a Notification whether they earned income from that Relevant Activity or not.
How long does it take to make an amendment in the Notification (or Economic Substance Report)?
The concerned Regulatory Authority is responsible for approving amendment requests. The entity must contact them for further information.
By when can we file the ESR Notification?
Notifications for a financial period must be submitted within six months from the end of the financial period.
By when can we file an Economic Substance Report?
Economic substance reports must be filed within twelve months from the end of the financial period.
Can an Economic Substance Report be filed immediately after filing a Notification?
Yes, the portal for Economic Substance Filing allows businesses to file an Economic Substance Report immediately after filing their Notification. But in some cases, there may be a delay in the generation of the Economic Substance Report after the submission of the Notification due to high demand. But one should not worry about it as the ESR Report will be generated later on and you will be notified when it is available on your dashboard.
Are there any cases where a business is only required to submit a Notification and not file an Economic Substance Report?
Yes, if a Licensee is an Exempted one or does not earn any income from its Relevant Activity. They are not required to file an Economic Substance Report. The web portal for Economic Substance Filing automatically assesses whether you need to file an Economic Substance Report based on your Notification, and only create a Report if you are required to submit one.
Do we need to audit the Financial Statements submitted along with the Economic Substance Report?
No, it is not required to audit the financial statement along with the Economic Substance Report. In the absence of audited financial statements, you can submit unaudited financial statements or management accounts.
Is it required to answer all the questions included in the Economic Substance Report template available on the Ministry of Finance website?
No, the Form for filling the Economic Substance Report available on the Ministry of Finance website is a smart form that automatically selects the relevant questions that must be completed by a Licensee based on the previous responses and information provided.
Is it necessary to file Economic Substance Notification and Economic Substance Report every year?
Yes, a Licensee must file Economic Substance Notification and Economic Substance Report every year till the business continues to do the relevant activity.
The experts at NSKT Global conduct a preliminary check on your business on the applicability of Economic Substance Regulation. If your business meets all the requirements for Economic Substance Regulation, then we provide full support and guide you to check whether the criteria on the satisfaction of Economic Substance are met or not. If the criteria for filling ESR Notifications or reports are not met, then we at NSKT Global help you to identify the gaps. We provide suggestions and improvements to ensure the compliance of Economic Substance Regulation for your business in the UAE. We also assist the Licensee to file Information Notification with the Relevant Authorities.
Disclaimer-: Do contact your business consultant for professional advice and accordingly take any compliance decision.
