Economic Substance Regulations [ESR]: What is ESR in UAE & Who Needs To File It?
Schedule Now Share Table of Contents The United Arab Emirates (UAE), honoring its commitment as a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS), introduced the Economic Substance Regulations (ESR) in 2019. These regulations aim to prevent multinational companies operating in the UAE from evading taxes in their home countries. By implementing ESR, the UAE strives to avoid being blacklisted as ‘non-cooperative’ by the EU, thereby promoting a fairer and more transparent business environment. According to the ESR, UAE onshore and free zone companies, as well as certain other business forms involved in specified “Relevant Activities,” must sustain and demonstrate sufficient economic presence in the UAE. This is known as the “Economic Substance Test.” This blog post will provide an overview of ESR, highlighting its benefits, penalties, and guidance on ensuring compliance. What is the Economic Substance Regulations (ESR) in UAE? The Economic Substance Regulations (ESR) in the UAE are a set of business taxation rules introduced in 2019 to ensure that UAE-based entities engaging in certain business activities maintain adequate economic presence within the country. These regulations are part of the UAE’s commitment to the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS), aiming to prevent multinational companies from using the UAE as a base to evade taxes in their home countries. Under ESR, UAE onshore and free zone companies, as well as other specified business forms conducting “Relevant Activities” (such as banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding company, intellectual property, and distribution and service centers), must meet the “Economic Substance Test.” This test requires entities to demonstrate substantial activities in the UAE, including having sufficient staff, premises, and expenditures relative to the activities undertaken. The UAE’s Economic Substance Regulations (ESR) appoint the Federal Tax Authority as the National Assessing Authority. This authority is responsible for determining whether entities meet the Economic Substance Test and for issuing penalties for any violations of the amended ESR. Adhering to these regulations is crucial for the UAE to avoid being labeled as a ‘non-cooperative’ jurisdiction by the EU, thereby promoting a fairer and more transparent business environment. Failure to comply can lead to substantial penalties and other regulatory actions. Benefits of Compliance with Economic Substance Regulations (ESR) Compliance with the Economic Substance Regulations (ESR) in the UAE offers several key benefits for businesses: Enhanced Reputation: Adhering to ESR demonstrates a commitment to international tax standards and corporate governance, enhancing the company’s reputation among global stakeholders and business partners. Avoidance of Penalties: Compliance helps businesses avoid significant financial penalties, administrative sanctions, and other legal consequences that arise from non-compliance with ESR requirements. Business Continuity: Meeting ESR requirements ensures smooth and uninterrupted business operations by avoiding potential disruptions caused by regulatory scrutiny or sanctions. Market Access: By complying with ESR, companies can maintain and expand their access to international markets, as non-compliant jurisdictions may face restrictions or blacklist by other countries or economic blocs like the EU. Investment Attraction: Compliance with ESR can attract foreign investment, as investors prefer jurisdictions that adhere to international tax standards and provide a stable and transparent regulatory environment. Tax Planning and Efficiency: ESR compliance can lead to more efficient tax planning and better management of tax risks, helping businesses optimize their tax positions while adhering to legal requirements. Alignment with Global Standards: By complying with ESR, businesses align themselves with global best practices in economic substance and tax transparency, contributing to a fairer international tax system. Regulatory Confidence: Demonstrating compliance with ESR instills confidence in regulatory authorities, reducing the likelihood of audits and inspections, and fostering a cooperative relationship with regulators. Overall, compliance with ESR not only helps businesses mitigate risks and avoid penalties but also positions them favorably in the global marketplace, fostering long-term growth and sustainability. Who Has to File ESR in the UAE? In the UAE, compliance with Economic Substance Regulations (ESR) mandates specific entities to file notifications and reports. These entities include: Onshore Companies Onshore companies are entities incorporated or registered under UAE mainland jurisdiction. These companies operate under the federal laws of the UAE and are subject to ESR requirements if they conduct any of the defined Relevant Activities. Compliance ensures these entities demonstrate adequate economic substance in the UAE, aligning with international tax standards and avoiding penalties. Free Zone Companies Free Zone companies are entities incorporated or registered in any of the UAE’s free zones, including financial free zones such as the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM). These zones offer various business incentives, including tax exemptions and 100% foreign ownership. However, companies operating in these zones must comply with ESR if they engage in Relevant Activities. Filing ESR notifications and reports is crucial to demonstrate that they maintain a substantial economic presence within the UAE. Other Business Forms Other business forms include a range of entities such as branches, representative offices, and partnerships that engage in Relevant Activities. Branches: These can be branches of foreign companies operating in the UAE. They must comply with ESR to show that their UAE operations have sufficient economic substance. Representative Offices: While these offices primarily engage in marketing and liaison activities, they must file an Economic substance notification if they conduct a Relevant Activity. Partnerships: Various forms of partnerships, including general and limited partnerships, must adhere to ESR requirements if they are involved in any Relevant Activities. What are the Relevant Activities to Which Economic Substance Regulations (ESR) Apply The Economic Substance Regulations (ESR) in the UAE apply to entities engaged in specific business activities known as “Relevant Activities.” These activities are essential to the regulations as entities engaged in them must show significant economic presence in the UAE. The Relevant Activities include: Banking: Engaging in deposit-taking, lending, and other financial services typically performed by banks. Insurance: Providing insurance products and services, including life, non-life, and reinsurance activities. Investment Fund Management: Managing investment funds, including activities such as portfolio management, fund administration, and advisory services. Lease-Finance: Offering leasing and
How To Apply For VAT Registration in UAE
Schedule Now Share Table of Contents Every registered business or entity whose taxable supplies and imports exceed the mandatory threshold of AED 375,000, or AED 187,500 for voluntary registration, must complete and submit an online VAT registration form through the Federal Tax Authority (FTA) website, typically within the fourth quarter. Upon successful registration, you will be provided with a Tax Registration Number (TRN). To ensure you complete the VAT registration formalities successfully, we are providing a step-by-step guide for applying for VAT registration. VAT Registration in UAE Value-added tax (VAT) registration is the process by which businesses and entities register with the Federal Tax Authority (FTA) in the UAE to collect and remit VAT on their taxable supplies and imports. This registration is essential for businesses to legally operate within the VAT framework established by the UAE government. How It Works Once registered, businesses must charge VAT on taxable goods and services they provide. They can also reclaim VAT paid on business-related expenses. Here’s how it works: Charging VAT: Once registered, businesses must charge VAT at the applicable rate (currently 5%) on all taxable goods and services they provide. This VAT is added to the sales price and collected from the customer. Reclaiming VAT: Businesses can reclaim VAT paid on business-related expenses and purchases. This is known as input tax and helps reduce the overall VAT liability. Net VAT Payment: The difference between the VAT collected from customers (output tax) and the VAT paid on purchases (input tax) is calculated. If the output tax exceeds the input tax, the business must remit the difference to the FTA. If the input tax exceeds the output tax, the business can claim a refund or carry the excess forward to the next tax period. Filing VAT Returns: Businesses are required to file regular VAT returns (usually quarterly) with the FTA, detailing the amount of VAT collected and paid. Criteria Mandatory Registration: Businesses with taxable supplies and imports exceeding the mandatory registration threshold of AED 375,000 annually must register for VAT. This threshold ensures that significant economic activities are brought within the VAT system. Voluntary Registration: Businesses with taxable supplies and imports between the voluntary registration threshold of AED 187,500 and AED 375,000 can choose to register voluntarily. Voluntary registration is beneficial for smaller businesses and startups as it allows them to reclaim VAT on their expenses, enhancing their cash flow and competitiveness. In summary, VAT registration in the UAE involves understanding the criteria for mandatory and voluntary registration, complying with the process of charging and reclaiming VAT, and regularly filing VAT returns to the FTA. This process ensures legal compliance and financial benefits for businesses operating within the UAE. VAT Registration Requirements in UAE VAT registration in the UAE is essential for businesses meeting the specified thresholds to ensure compliance with tax laws. By understanding the requirements and process, businesses can effectively manage their VAT obligations and avoid penalties. Here are the key documents required for both mandatory and voluntary VAT registration in UAE: Trade License: A copy of the business trade license issued by the relevant UAE authority. Passport Copies: Passport copies of the business owner(s) and partners. Emirates ID: Emirates ID copies of the business owner(s) and partners. Business Activities: A detailed description of the business activities. Contact Information: Contact details, including physical address, phone number, and email address. Financial Statements: Recent financial statements showing the business’s turnover for the past 12 months. Bank Account Details: Bank account information for the business. Customs Registration Details: If applicable, details of any customs registration. Authorization Documents: Authorization documents for signatories, if someone other than the owner is completing the registration. These documents are essential for completing the VAT registration process with the Federal Tax Authority (FTA) in the UAE. How To Apply For VAT Registration in UAE Applying for VAT registration in the UAE involves several steps, which can be completed online through the Federal Tax Authority (FTA) portal. Here’s how to apply: 1. Create an Account on the FTA Portal Visit the Federal Tax Authority (FTA) website at www.tax.gov.ae and create an account if you don’t have one. You will need to provide your email address, create a password, and complete the verification process to activate your account. 2. Log In to the FTA Portal Use your newly created credentials to log in to your account on the FTA portal. Once logged in, you can access various tax-related services and forms. 3. Access the VAT Registration Form Navigate to the ‘VAT Registration’ section within the portal and click on ‘Register for VAT’. This will open the VAT registration form that you need to complete. 4. Complete the Registration Form Fill in the registration form with accurate details: Business Information: Enter your business’s trade name, license number, and a detailed description of your business activities. Contact Information: Provide your business’s physical address, phone number, and email. Owner/Partners Information: Include passport copies, the concerned person’s contact details and Emirates ID details of the business owner(s) and partners. Financial Information: Provide recent financial data, including your annual turnover, taxable expenses, and expected revenue. Include details of any import/export activities. Bank Details: Enter your business’s bank account information. 5. Upload Required Documents Upload scanned copies of all the necessary documents required for VAT registration: Trade license Passport copies of the owner(s) and partners Emirates ID of the owner(s) and partners Club, Charity, or Association Registration Documents Financial statements showing the business’s turnover Bank account details Business activity descriptions Customs registration details, if applicable Authorization documents for signatories, if someone other than the owner is applying 6. Review and Submit Carefully review all the information you have provided to ensure its accuracy. Once you are satisfied that everything is correct, submit the completed registration form through the portal. 7. Receive Tax Registration Number (TRN) After submission, the FTA will review your application. If approved, you will receive a Tax Registration Number (TRN) and a VAT Certificate via email. This number and registration certificate is essential for
