The Economic Substance Requirement (ESR) rule is mandatory for Mainland and Free Zone enterprises in the UAE, with the exception of exempted entities engaged in ‘Relevant Activity’. In response to the OECD’s Base Erosion and Profit Shifting (BEPS) effort, the goal of this legislation is to prevent detrimental tax practices by multinational corporations that shift earnings by taking advantage of the zero-tax rate available to UAE firms in the UAE.
Companies must appropriately examine their business activities beyond those mentioned on their license to determine if they are engaging in “Relevant Activity.” They must also exhibit ‘economic substance’ in the UAE, which is legal business activity, in order to carry out the Relevant Activity in the UAE. Companies must file an ESR Notification and ESR Report on the Ministry of Finance portal by the applicable timeframes to comply with the ESR rule.
Testing parameters for ESR compliance:
- Adequate operating expenditure
- Adequate physical infrastructure or assets
- Directed and managed in the UAE
Since its implementation in April 2019, ESR has become a critical regulatory obligation for UAE authorities, with the Federal Tax Authority designated as the national assessment authority. However, because ESR is a new legislation, it remains a difficulty for many businesses, who must ensure they understand and follow the essential requirements to avoid penalties or legal concerns.
Corporate Group’s professional legal team can assist your firm with ESR compliance through a variety of services.
- assessing your company’s Relevant Activities and advising on how to establish appropriate Economic Substance, including options for filling any gaps that may arise.
- Preparation of ESR Notifications and ESR Reports, as well as submission management on the Ministry of Finance portal.
- Ensure ESR regulations are followed in order to avoid penalties or legal concerns.
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