The ESR in the UAE is a Provision on economic Presence (Economic Substance Regulations) applied to commercial enterprises located in the country and engaged in certain types of activities (including enterprises in the free zone). In accordance with it, companies are required to provide evidence of the presence of business in the territory of the Arab Emirates. The purpose of this control measure is to combat artificial business structures that are registered in low–tax zones in the UAE to receive tax benefits, but are not engaged in real activities on the territory of the Principality.
Requirements for economic presence
The need to introduce control over the economic presence arose in 2017, when the European Union put the Emirates on the blacklist of countries that do not prevent the erosion of the tax base. The legislation of the UAE allowed to withdraw from taxation the profits of European companies operating in different places, but registered in the UAE. At the same time, information about the financial affairs of its residents was carefully guarded.
The Government of the Emirates has decided to satisfy the claims from the EU and take measures against business structures, the main purpose of which is tax evasion. In 2019, a resolution was adopted on the establishment of requirements for economic presence. Thanks to such a step, measures against the principality by European structures were softened and the country moved from the blacklist to the “gray”, i.e. the attitude towards economic agents has become more loyal.
The requirements of Economic Substance Regulations apply to individuals and legal entities conducting “relevant activities” in free zones. According to the Resolution, all offshore companies are considered part of the FEZ.
The new Decree does not apply to firms in which 51% (or more) of the shares are directly or indirectly owned by the state, the government of any of the seven emirates or one of the state agencies.
Who is covered by the ESR regulation
All legal entities that have the right to engage in commerce on the territory of the Principality (the right is determined by the presence of a license, registration on the territory of the country or another type of permit issued by the relevant authority) and engaged in one of the following types of commercial activities fall under the ESR regulations. These include organizations engaged in:
- banking or other financial business;
- investment fund management;
- shipping business;
- commerce in the field of intellectual property;
- wholesale purchases;
- providing services;
- holding business.
Also, organizations that are the headquarters of a certain group or the head management center fall under the Economic Substance Regulations.
How to prove economic presence?
To demonstrate the presence of economic activity on the territory of the Principality means to provide:
- evidence that the management of the institution is carried out from the territory of the principality;
- documents proving that the main commercial activity is conducted within the Emirates;
- office lease agreement;
- staffing table illustrating the availability of personnel working within the country with the appropriate level of qualification;
- accounting documents confirming a sufficient number of assets located in the UAE and generating income, as well as expense statements.
In accordance with the ESR requirements, the licensee has the right to outsource actions with its assets. But this right does not apply to the function of directorship and management.
Aspects worth considering
- Companies engaged in leasing and other types of financing, as a result of which there is no provision for income (remuneration for the provision of funds on credit or other financial agreements) or compensation in the form of remuneration, interest, lease payments, capital gains, are exempt from compliance with ESR requirements. The collateral provided by the borrower does not provide for compensation.
- Institutions included in the list of business categories for which ESR requirements are mandatory must annually provide information on the implementation of commercial activities of the FEZ administration. At the same time, it does not matter whether income was received during this period or not.
- Only those firms that have received income over the past financial period are required to submit ESR declarations and cover their economic presence.
- If one commercial group includes several companies engaged in different types of activities, then the ESR requirements do not apply to the entire group, but to each enterprise separately. At the same time, each company has the right to use common aspects to demonstrate its presence, for example, the number of personnel, assets, if there is an agreement that these common aspects can be transferred from organization to organization.
- The director of a company falling under Economic Substance Regulations does not have to be a resident of the UAE. It is enough if he is physically present at the meetings of the directors.
Rules for preparing for ESR compliance checks
Regulatory organizations have the right to request audit documentation within 6 years after the termination of the company’s activities. This means that all documents must necessarily be saved during this period.
To prove an active business presence in accordance with the requirements of the Economic Substance Regulations, the company must:
- set the type and amount of income from your activities;
- demonstrate the presence of a physical office, employees employed in it and in production (if any), as well as income-generating assets;
- maintain documentation reflecting the company’s activities: accounting, personnel movement, contracts, agreements, contracts that were concluded during the past financial period.
Sanctions for violation of the ESR in the UAE
Violations of Economic Substance Regulations are punishable by fines. Failure to complete the test in the first year will cost 10 000 – 50 000 AED, in the second and subsequent – from 100 to 300 thousand AED. For failure to provide information or submission of inaccurate information, a fine of 10 to 50 thousand AED is provided.