ESR Notification or Reporting Required in UAE

Ministry of Finance, UAE has announced the revocation of the requirement of submitting notification and reporting to comply with ESR Law. The Cabinet Decision No. 98 of 2024 clarifies that UAE companies are not required to report under Economic Substance Regulations for the year after December 31 2022.

Background of ESR in UAE

Economic Substance Regulations (ESR) were implemented in the UAE in the year 2019 in order to prevent multinational entities from shifting their profit from high-tax countries to low-tax or no-tax countries. During 2019, UAE had not introduced any direct taxation, like Corporate Tax, and being a tax heaven it was required to have ESR in place to match with the OCED guidelines and international best practices.

The Economic Substance Regulations (ESR) has narrowed down potential business activities which can be used for Base Erosion and Profit Shifting (BEPS) and listed down 9 relevant activities which are as below;

• Banking Business
• Insurance Business
• Shipping Business
• Holding Business
• Lease and Finance Business
• Distribution and Service Center Business
• Intellectual Property Business
• Headquarter Business
• Investment Fund Management Business

Any UAE company conducting any one out of the relevant activity during the relevant year was required to notify the Ministry of Finance within 6 months from the end of the financial year and submit an ESR report within 12 months from the end of the financial year. While submitting the report, the company was obligated to demonstrate that the business is not Shell Company and has a proper economic presence (substance) in the UAE by way of adequate tangible assets in the country, adequate full-time qualified employees in the country, and the Place of Management is in the UAE etc.

Failure to submit the ESR notification before the deadline was penalized with AED 20,000 and the late report submission was penalized with AED 50,000.

Introduction of Corporate Tax in the UAE

The Corporate Tax Law was published on 09/12/2022 and it is implemented with effect from 01/06/2023. Corporate Tax is applicable for all residents and non-residents who earn income from UAE through a permanent establishment or nexus or source income. Below are the corporate tax rates applicable in the UAE

Free Zone tax benefits

UAE authority has announced a tax holiday for free zone companies, subject to conditions. If you would like to read more about Free Zone taxation read here.

As per Cabinet Decision No.100 of 2023, one of the conditions for availing a 0% Corporate Tax benefit is that the free zone entity must maintain adequate substance inside the free zone by way of adequate assets, adequate full-time qualified employees, adequate operating expenditure inside Free Zone & the core income generating activities are conducted in a free zone or designated zone (for distribution activity).

Substance Requirement in Economic Substance Regulations Vs Corporate Tax

With the inception of Corporate Tax Law in the UAE, the country is no longer a tax haven. The benefits of 0% corporate tax remains in the free zone only, subject to conditions. By making the substance requirement mandatory for Free Zone companies in order to get the benefits, the substance requirement is basically shifted from the whole UAE to Free Zones.

Publishing of Cabinet Decision No. 98 of 2024

In light of the above, the UAE Ministry of Finance published Cabinet Decision No.98 of 2024 which amends the provision of Cabinet Decision No. 57 of 2020. The new cabinet decision has come up with key points below;

1. All penalties imposed for license holders under ESR for the financial year ending after 31 December 2022 have been cancelled.
2. Penalties imposed and paid by license holders for the financial year ending after 31 December 2022 will be refunded.
3. The requirement for submission of notification and report under economic substance regulation is cancelled for the financial year ending after 31 December 2022.

The new cabinet decision has given a huge relief to license holders as well as the compliance requirements to align with the UAE Corporate Tax Law.

To learn more about No More ESR Notification or Reporting Required in UAE, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.