ECONOMIC SUBSTANCE REGULATIONS (ESR)
The Economic Substance Regulations (ESR) in the UAE require certain entities to demonstrate real economic activity within the country to prevent tax avoidance. Compliance involves meeting specific requirements, including having a physical presence and conducting substantial business operations. Failure to comply can lead to penalties.
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About ESR
On 30 April 2019, the UAE Cabinet issued the Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance Regulations (ESR) requiring all in-scope UAE entities to comply with the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) to ensure that profits are accounted by the entities where the actual economic activities are conducted and value created.
The UAE applies Economic Substance Regulations (ESR) to local companies located in the country, including businesses in the free zones and those engaged in any of the defined ‘relevant activities’. These companies must provide the regulatory authorities with economic substance notifications, including preliminary information about the activities. This notification is a prerequisite for submitting an economic substance report by the company.
ECONOMIC SUBSTANCE REGULATIONS (ESR): NOTIFICATION REQUIREMENTS
The ESR has been made applicable from the Financial Year commencing on or from January 1, 2019. Entities that fall within the scope of the Economic Substance Regulations (ESR) are required to submit an annual notification form to their Regulatory Authority, i.e., an Economic Substance Report (ESR) within 12 months from end of their financial year.
An entity is not required to undertake the Economic Substance Test and submit the Economic Substance Report if:
- It has not earned any income from the relevant activity; or
- If it meets the conditions to be categorized as exempt
But regardless of the above the entity would have to submit Notification.
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