The UAE’s latest amendments to the Economic Substance Regulations (ESR), outlined in Cabinet Decision No. (98) of 2024, mark a significant shift for businesses operating in the region. These changes are aimed at aligning with the newly implemented corporate tax regime. They bring relief to businesses by reducing compliance requirements and waiving certain penalties.
ESR reporting is applicable to companies, including multinationals, engaged in specific activities, viz. banking, insurance, shipping, finance activities etc.
Let’s understand the amendments to the ESR.
Restricting the Applicability of ESR
The new Decision No. (98) of 2024 introduces several important changes to the UAE's ESR by amending Decision No. (57) of 2020. These include restricting the application of ESR to financial years starting from January 1, 2019, through December 31, 2022. In effect, companies and entities will not be required to submit ESR notifications and reports for financial years ending after 31 December 2022.
Waivers on Administrative Penalties
One of the most significant changes is the waiver of penalties for failing to meet ESR obligations during the specified financial periods. Penalties imposed for non-compliance with ESR filings prior to December 31, 2022, have been waived. Furthermore, penalties imposed after this date will also be waived, provided businesses fulfil all relevant national compliance obligations.
For businesses, particularly multinational companies, this provides a much-needed reprieve. The introduction of the UAE’s corporate tax system, with its own economic substance requirements, has made certain aspects of ESR redundant. By waiving penalties, the UAE is eliminating the need for overlapping compliance efforts.
Impact of Corporate Tax on ESR Requirements
The introduction of corporate tax in the UAE has played a pivotal role in the recent ESR amendments. Under the new corporate tax regime, businesses are already required to demonstrate economic substance, particularly in relation to taxable profits. This means that many of the obligations previously mandated under ESR—such as proving adequate economic presence and submitting related reports—are now covered under the corporate tax framework.
For example, businesses engaging in “relevant activities,” such as banking, insurance, investment fund management, and holding company activities, no longer need to submit separate ESR filings.
The decision to waive penalties for 2023 and refund those already paid is a welcome move for businesses struggling with ESR compliance. Companies that were fined for failing to submit their ESR notifications or reports in 2023 will now receive a refund, offering financial relief and parity amongst the corporates who have complied with the ESR regulations and those who have not complied with.
Conclusion
The UAE’s recent updates to the ESR reflect the country’s evolving business landscape, with a clear focus on integrating compliance obligations into the corporate tax framework. Measures like waiving penalties and reducing redundant filings enhance investor confidence and ease regulatory challenges for companies operating in the UAE.
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