Economic Substance Advisory

The Economic Substance Requirement, or ESR, regulation requires Mainland and Free Zone companies in the UAE (unless so exempted) conducting ‘Relevant Activity’ to submit an ESR Notification and ESR Report on the Ministry of Finance portal before the applicable deadlines.

The ESR regulation is in response to OECD’s BEPS (Base Erosion and Profit Shifting)  to counter harmful tax practices; specifically, to curb profit-shifting transactions between multinational companies taking advantage of the zero-tax rate applicable for UAE entities in the UAE.

The ESR requires companies to correctly assess their business activities beyond the activities listed in the business license to determine whether they are conducting any ‘Relevant Activity’ and subsequently demonstrate ‘economic substance’ in the UAE – i.e., signs of a legitimate business – for carrying out that Relevant Activity in the UAE. The testing parameters for ESR compliance are:

1. Adequate operating expenditure
2. Adequate physical infrastructure or assets
3. Directed and managed in the UAE

ESR is an important regulatory item for the UAE authorities who have been actively implementing it since its introduction in April 2019, with the Federal Tax Authority appointed as the national assessment authority. At the same time, as a relatively recent regulation, understanding and complying with ESR is a challenge for many companies.

At MBG, our vastly experienced legal team helps you with ESR compliance with:

• Assessing Relevant Activities
• Advice on demonstrating adequate Economic Substance per ESR test parameters and methods to cure the gaps the company may have
• Preparation of ESR Notification and ESR Report
• Submissions on the Ministry of Finance portal