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The significant changes to ESR regulations UAE 2023 redefine the scope of the ESR and offer relief for businesses, particularly aligned with the UAE’s ever-evolving corporate tax regime. Let us explain these changes in detail, what they mean for your business and how to stay compliant.
ESR regulations UAE 2023: Key Highlights
Amendment Overview: The changes announced apply the ESR only to accounting periods ending on or before 31 December 2022. Hence, businesses with accounting periods starting on or after 1 January 2023 are no longer required to file ESR notifications or reports.
Cabinet Decision No. 98 of 2024: Published in the Official Gazette on 16 September 2024, this amendment adds Article 2(B) to Cabinet Resolution No. 57 of 2020. It effectively limits the ESR’s application to fiscal years between 1 January 2019 and 31 December 2022.
Impact on Businesses: Entities that were previously obligated to comply with the ESR are now exempt for fiscal years after 31 December 2022. This streamlines compliance process for businesses by aligning it with the UAE corporate tax regime, which imposes similar substance requirements on Free Zone Persons (FZPs) seeking to qualify as a Qualifying Free Zone Person (QFZP).
The Key Implications for Qualifying Free Zone Persons (QFZPs)
After the period of 2022, the ESR is no longer applicable, however, QFZPs (Qualifying Free Zone Persons) are still required to maintain adequate substance in the UAE to avail zero percent corporate tax benefit. QFZP need to undertake its core income-generating activities in a Free Zone and, having regard to the level of the activities carried out, have adequate assets, an adequate number of qualified employees, and incur an adequate amount of operating expenditures.
Implications for Business Entities in the UAE
No More ESR Compliance for Post-2022 Periods: Any business that was once subject to the ESR for fiscal years starting on or after 1 January 2023 is no longer needed to file ESR notifications or reports.
Cancellation of Fines: As per the ESR compliance update UAE, fines for non-compliance of ESR for periods after 31 December 2022 will be cancelled. Additionally, businesses can claim a refund in case they have already paid the fine.
Way Forward for business entities in the UAE
Focus on Corporate Tax Compliance: Though the ESR is no longer applicable after 2022, businesses should focus on complying with the UAE corporate tax law.
QFZPs must primarily demonstrate adequate substance by providing supporting documentation and conducting core income-generating activities (CIGAs) in free zone.
Claim Refunds for Paid Fines: If in any case your business has already paid ESR-related fines for periods after 2022, they can simply claim their refund through the appropriate channels.
Conclusion
The removal of the Economic Substance Regulations UAE brings much-needed relief for businesses that were under the pressure of meeting compliance requirements. The amendments have undoubtedly reduced compliance requirements, and by aligning the regulations with the UAE corporate tax regime, businesses find it much easier to demonstrate transparency in their business.
Apart from this, to ensure full compliance for businesses, these changes should further be embedded with in-detail review of obligations under the UAE corporate regime. Additionally, businesses that were under the scope of ESR regulations UAE 2023 shall claim any applicable refunds for fines already paid.
To avoid any sort of mistake, businesses must seek expert guidance on how these changes can affect them. Moreover, to ensure their corporate tax compliance, businesses can contact our expert team at tax@aaconsultancy.ae or call +971 56 511 1912.
