BINJOY Auditors L.L.C

ESR

BINJOY Auditors L.L.C

Economic Substance Regulations (ESR)

History

The UAE implemented the Economic Substance Regulations under Cabinet of Ministers Resolution No. 31 of 2019, effective from April 30, 2019. Subsequent guidance on these Regulations was issued on September 11, 2019 through Ministerial Decision No. 215 of 2019.

Applicability

These Regulations mandate that companies and other entities registered in the UAE engaging in one or more "Relevant Activities" must demonstrate economic substance within the UAE for these activities. Additionally, they are required to fulfill notification and return filing obligations. Such entities are referred to as "Licensees" under the Regulations and this document.To assist UAE businesses in comprehending the scope and application of these Regulations, this document offers detailed insights into the defined "Relevant Activities" and their corresponding "Core Income-Generating Activities" (CIGAs).

Why ESR in UAE

In the UAE, conducting business mandates that economic activity and substantial purpose must directly benefit the local economy. Transactions conducted within the UAE must hold genuine value and physical presence here, ensuring compliance with Economic Substance Regulations (ESR).

Who need to comply?

Compliance applies to any individual or entity licensed by UAE regulatory bodies to engage in Relevant Activities within the country, encompassing Free Zones and Financial Free Zones alike

Exemption

Entities where the Federal Government, any UAE Emirate Government, or any governmental authority with at least 51% direct or indirect ownership in its shareholding are exempt from ESR requirements.

Relevant Activity

The Regulations pertain to entities and various business structures established within the UAE, whether in a Free Zone or Financial Free Zone, engaging in specific Relevant Activities:

  1. Banking operations

  2. Insurance services

  3. Investment fund management

  4. Lease financing

  5. Headquarters management

  6. Maritime shipping

  7. Holding company operations

  8. Intellectual property management

  9. Distribution and service center operations

Relevant Regulatory Authorities
  • Insurance Authority
  • Ministry of Economy
  • Securities and Commodities Authority
  • UAE Central Bank
  • The competent authority in the Free Zone and Financial Free Zone for the relevant activity.
How they might affect you and your business
  • Management structure
  • Income generation
  • Staffing and office space
  • Reporting responsibilities
Penalty
  • Failure to provide information/furnish notification: AED 10,000 – AED 50,000
  • Failure to meet economic substance test (1st Year): AED 10,000 – AED 50,000, with information exchanged with foreign competent authorities of the parent company, ultimate parent company, and beneficial owner.
  • Failure to meet economic substance test (Subsequent Year): AED 100,000 – AED 300,000, with information exchanged with foreign competent authorities of the parent company, ultimate parent company, and beneficial owner. Additionally, the license may be suspended, withdrawn, or cancelled.