Accounting and Tax Services
Economic Substance Regulations (ESR)
The United Arab Emirates (UAE) implemented Economic Substance Regulations as part of its commitment to the OECD Inclusive Framework and in response to an EU assessment. These regulations aim to prevent harmful tax practices and discourage low-tax jurisdictions from attracting profits for mobile activities without genuine economic substance.
The UAE's Economic Substance Regulations target companies (onshore, free zone, and specific others) engaged in designated activities. These regulations require companies to demonstrate a sufficient "economic presence" within the UAE, proportional to their activities. This ensures UAE entities report profits accurately, reflecting the actual economic activity they conduct in the country.
Who Needs to Comply with ESR in the UAE?
The Economic Substance Regulations (ESR) apply to licensees—companies, partnerships, and other business forms—registered in the UAE, including free zones and financial free zones. These regulations target businesses that carry on any activity deemed “relevant” under the ESR framework.
Here’s a crucial point: determining ESR applicability requires a “substance over form” approach for UAE businesses. This means looking beyond the activities listed on your commercial license and focusing on the actual activities conducted during a financial period.
If you need clarification on whether your business conducts a relevant activity under the ESR, seeking professional guidance is highly recommended.
Understanding Financial and reportable period
Financial Period:
This refers to the timeframe for which a licensee prepares its financial statements (if applicable). Newly established licensees may have a first-year financial period that’s either shorter or longer than usual.
Reportable Period:
This is the specific accounting period, starting on or after January 1st, 2019, for which a notification under the ESR regulations needs to be filed. It ends on the same date as the financial statements (if any) are prepared. Essentially, the reportable period is always the financial period before the one in which the notification is due.
Incorporation Date: October 1st, 2019
Financial Period: October 1st, 2019–March 31st, 2020 (shorter period)
Reportable Period: Same as the Financial Period (October 1st, 2019–March 31st, 2020)
Newly Incorporated Licensee (Long Period):
Incorporation Date: January 1st, 2019
Financial Period: January 1st, 2019–March 31st, 2020 (longer period)
Reportable Period: This first long period is reported, but subsequent notifications will cover the following year (April 1st, 2020–March 31st, 2021).
Licensee Incorporated Before January 1st, 2019:
If your company were incorporated before January 1st, 2019, with a financial year ending before that date, you wouldn’t need to submit a notification for that period.
Your first reportable period would be the following year (e.g., July 1st, 2019–June 30th, 2020).
ESR Relevant Activities in the UAE
Banking
Insurance
Investment
Shipping
Lease finance
Headquarters
Intellectual property
