WHAT WERE THE REQUIREMENTS UNDER ECONOMIC SUBSTANCE REPORTING (ESR)?

Companies under the scope of ESR had to meet the following key requirements: Economic Substance Test: Businesses had to prove they conducted relevant activities (e.g., banking, insurance, holding companies, intellectual property) and managed these activities from within the UAE. Reporting and Filing: Annual ESR notifications and reports detailing business operations, income, and expenses were mandatory, ensuring compliance and transparency. Penalties for Non-Compliance: Failing to comply could lead to administrative penalties (AED 20,000 – AED 50,000) and license suspensions.

HOW TO NAVIGATE THIS CHANGE?

While the ESR requirement is no longer in place, staying informed on other compliance obligations is crucial. Here are some recommendations: Stay Updated on Regulatory Changes: The UAE’s regulatory environment can shift quickly. Companies should keep track of updates from the Ministry of Finance and other authorities. Seek Expert Guidance: If unsure how these changes impact your business, consult tax and legal experts. They can provide clarity on what documentation is still needed under the Corporate Tax law and other regulations. Reassess Corporate Structure: Use this opportunity to review your business model and ensure alignment with the UAE’s current environment. This might include updating documentation or restructuring for tax efficiency.

Understanding VAT in the UAE: Registration, Exemptions, Deadlines, and Common Mistakes

November 8, 2024

Bahrain Arbitration Court Strengthens Singapore Ties As Featured on AGBI – 20 November, 2024

November 20, 2024

THE UAE’S CANCELLATION OF ECONOMIC SUBSTANCE REPORTING REQUIREMENT: WHAT IT MEANS FOR BUSINESSES

Q: WHY CANCEL ECONOMIC SUBSTANCE REPORTING (ESR)?

As of December 31, 2022, the UAE Ministry of Finance cancelled the mandatory annual filing of Economic Substance Reports (ESR). This change is part of a broader effort to streamline compliance and enhance the UAE’s reputation as a global business hub.

Q: WHAT ARE THE IMPLICATIONS FOR BUSINESSES?

Easing Compliance Burdens: Companies can now focus on strategic initiatives without the pressure of annual filings, a welcome relief for smaller firms that found the process costly and time-consuming. Focus on Core Operations: With fewer regulatory obligations, businesses can direct resources toward core activities, growth, and expansion strategies. Compliance with New Regulations: Despite the ESR cancellation, companies must still follow other regulations, particularly the Corporate Tax law. Businesses must maintain proper documentation to ensure transparency and accountability.

Table of Contents

This article has been researched and written by the Tax & Compliance Team at Creation Business Consultants. AI has not been used in generating this article.

WHAT IS ECONOMIC SUBSTANCE REPORTING?

The UAE introduced Economic Substance Regulations (ESR) during 2019 to comply with international tax standards of the OECD and the European Union. The ESR ensures that businesses have a substantive presence in the UAE beyond merely having a legal address. Companies were required to demonstrate income generation from core activities and maintain a physical presence with staff and operating expenses in the UAE.

WHAT WAS REQUIRED UNDER ECONOMIC SUBSTANCE REPORTING (ESR)?

Any company within the scope of the ESR had to comply with several important requirements:

Economic Substance Test: Businesses had to demonstrate they were conducting relevant activities (Banking, Insurance, Holding Companies, Intellectual Property, etc.) and managing those activities from the UAE.
Reporting and Filing: Yearly documentation of ESR notifications and reports that detailed the business operations, revenue, and expenses of the business was mandatory, to demonstrate compliance and transparency.
Penalties for Non-Compliance: Non-compliance resulted in administrative penalties (range being AED 20,000 – AED 50,000) and enforcement actions such as the suspension of licenses.

BOOK A FREE CONSULTATION

WHAT HAS CHANGED IN RESPECT TO ECONOMIC SUBSTANCE REPORTING (ESR)?

The UAE Cabinet Decision No. (98) of 2024 was adopted on September 16, 2024 and amended ESR significantly:

Broadened Applicability: The ESR now applies retroactively to financial years from 2019 to 2022.
Penalty Waiver: Exempt businesses would not receive administrative penalties for unfulfilled duties until December 31, 2022.
Ongoing Relief: Entities that comply with national obligations to maintain compliance may be further exempt from penalties after 2022.

WHY CANCEL ECONOMIC SUBSTANCE REPORTING (ESR)?

Effective December 31, 2022, the UAE Ministry of Finance terminated the requirement to mandatory annual filing of ESR – or Economic Substance Report. To explain this change more broadly, it is a part of their efforts to simplify reporting and improve the UAE’s position in global trade.

REASONS FOR THIS CHANGE:

Central Alignment to Global Standards: The UAE is evolving as a favorable tax environment, offering businesses broader operational capabilities without excessive compliance burdens.
Encouragement of Business Ecosystem and Growth: Reducing the regulatory burden is creating an improved environment that will generate foreign investment and foster growth sustainably.
Avoiding Redundancy: Starting June 1, 2023, with the formal introduction of the UAE Corporate Tax law, there are now more comprehensive mechanisms to monitor businesses. This law requires maintaining robust records, reducing the need for additional ESR reports.

WHAT ARE THE IMPLICATIONS FOR BUSINESSES?

Easing Compliance Obligations: Companies can focus on strategic objectives instead of having to worry about an annual filing for the ESR. This should make things easier and reduce costs for smaller firms whose compliance with the ESR cost them time and money.
Focus on Operational Activities: With fewer compliance obligations, businesses will have the ability to focus their valuable resources and energy on operational activities related to development, growth and expansion strategies.
Compliance with Other Obligations: While the ESR requirement has been canceled, companies must still adhere to other regulatory obligations, particularly the Corporate Tax law, and maintain records that demonstrate compliance with transparency and accountability.

HOW TO DO NEXT?

Although there is no longer a requirement to report on the ESR, it is still important that companies pay attention to the requirements surrounding other regulatory obligations. Here are some suggestions:

Stay aware of what is happening with other regulations: As with anything in the UAE, the regulatory landscape changes quickly; Companies need to continue to keep an eye on what is being communicated from the Ministry of Finance, and any other regulatory authority in the UAE.
Seek Guidance: If companies are unclear about their obligations following the ESR changes, they should consult with tax and legal advisers to understand their requirements under the Corporate Tax law and any additional regulations.
Review Corporate Structure: Businesses should take this opportunity to reassess their models in light of the new UAE environment. Updating documentation or restructuring may be necessary to comply with the new tax landscape.

LOOKING AHEAD

The abolition of the ESR reporting requirement reflects a commitment to a better compliance experience for companies in the UAE. It underscores the UAE’s dedication to facilitating ease of doing business as a regional and global hub. While companies must remain vigilant regarding other regulatory obligations, particularly under the new Corporate Tax law, this change signals a flexible regulatory approach that accommodates the business community while maintaining transparency and international compliance. Companies should view the cancellation of the ESR as an opportunity to streamline operations and invest resources into regional growth.

TAKEAWAY

For more information, please reach out to our team of consultants and secure your free consultation with an expert. Our team will guide you through the regulatory landscape to help avoid potential compliance issues.