FREQUENTLY ASKED QUESTIONS FOR ECONOMIC SUBSTANCE REGULATION (‘ESR’) 


1.    What is Economic Substance Regulation and the purpose for enacting them? 

The UAE introduced Economic Substance Regulation (ESR) on 30 April 2019 through a Cabinet of Ministers Resolution No. 31 of 2019.

This was done as a part of UAE’s commitment as a member of the OECD Inclusive Framework to implement the action points of OECD base erosion and profit shifting framework for countries across the globe with low or no corporate taxes where harmful tax practices such as tax avoidance and evasion are prevalent. UAE’s move to implement ESR also came in response to an assessment of the UAE’s tax framework by the European Union (“EU”) Code of Conduct Group on Business Taxation

The objective of this new regulation is to ensure that all legal entities in UAE have genuine substance in the region and are reporting actual profits generated from activities conducted in the region. 

     2.    Who does the Economic Substance Regulations apply to?

     ESR applies to all legal forms of business licensed with Hamriyah Free Zone carrying on one or more “Relevant Activities” in UAE.

     3.    Who is exempt from ESR? 

       Licensees having at least 51% direct or indirect ownership of the Federal or an Emirate Government, or a UAE Government body or authority,        are exempt under ESR.

     4.    Which businesses are required to file a Notification by 30th June 2020? 

        Licensees having financial year commencing on or after 1 January 2019 and ending on or before 31 December 2019 have to file Notification by         30 June 2020. 

    5.    What if the business has a financial year that ends after 31 December 2019 (e.g. a financial year ending 31 March 2020 or 30 June 2020)?

        There is no statutory requirement to file the notification by 30 June 2020. The notification deadline will be announced shortly.

        No penalties will apply if a notification for financial years ending after 31 December 2019 is not submitted by 30 June 2020.

    6.    What if the business has a long first financial reporting period which started in 2018 and ended during 2019 (e.g. 1 October 2018 to 31 December 2019), is the business required to file a Notification for the period by 30 June 2020?

        No, in the above example, the Licensee's first reportable period will be 1 January 2020 to 31 December 2020 and the first Notification would be         due in 2021.   

    7. Does the ESR Notification submission deadline of 30th June 2020 apply to new entities who have taken license in HFZA during the year 2020? ?

No. The aforesaid deadline would apply to only those entities who are licensed and existing in HFZA prior to the year 2020 and whose reportable period is as mentioned in FAQ No.4..

     8.    Where can I find the ESR legislation and guidance? 

        The ESR legislation and guidance are as follows:

                       ·         Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance Regulations , as amended by Cabinet Resolution No. 7 of                     2020 (Regulations)

                      ·         Ministerial Decision No. 215 of 2019 (Guidance)

                      ·         Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies to identify the relevant regulatory authority to                     implementing ESR

 The FAQs are also published by the Ministry of Finance on their website along with the flowchart.

9.    What are Relevant Activities under ESR? 

    The Relevant Activities under the Economic Substance Regulations are:

               ·         Banking Businesses

               ·         Insurance Businesses

               ·         Investment Fund Management Businesses

               ·         Lease-Finance Businesses

               ·         Headquarters Businesses

               ·         Shipping Businesses

               ·         Holding Company Businesses

               ·         Intellectual Property Businesses

               ·         Distribution and Service Centre Businesses

The MoF has released guide for relevant activities. Please refer to the guide  here  .

10.    Are the Relevant Activities same as the activities mentioned on Commercial licenses? 

No, substance over form approach should be adopted. The licensee is required to look beyond what is stated on the commercial license for the activities actually undertaken during the financial period.

11. What if a licensee purchases goods from a foreign group company, imports them into UAE and then sell them throughout Middle East? 

The licensee’s activities should be considered as a Distribution business under ESR as the goods are purchased from a foreign group company, imported into UAE and exported overseas. 

Therefore, the licensee is required to file the notification for ESR and is required to comply with the ESR tests.

12. What if a licensee purchases goods from a foreign group company, imports them into UAE and sells them in UAE? 

The licensee’s activities should not be considered as a Distribution business under ESR as the goods were not exported.

The licensee is not required to meet the ESR tests. However, the licensee is required to file the notification for ESR.

13. What if a licensee purchases goods from a foreign group company for them to be shipped directly to a distributor in Hong Kong? 

The licensee’s activities should not be considered as a Distribution business under ESR as the goods being traded were never imported into UAE.

In such a case, the licensee is not required to comply with ESR tests. However, the licensee is required to submit the notification for ESR.

14. What if a license only purchases goods from a third party? 

The licensee should not be considered as a distribution business if the goods are purchased from a third party.   

Therefore, the licensee is not required to comply with the ESR tests. However, the licensee is required to file the notification for ESR.

15. What if a licensee provides consulting service to its foreign group company and the service is in relation to the foreign company’s business outside UAE?   

The licensee’s activities should be considered as a service center business under ESR as the service is being provided to a foreign group company relating to its business overseas.

Therefore, the licensee is required to file the notification for ESR and is required to comply with the ESR tests.

16. What if a licensee is engaged in providing services to third parties? 

The licensee should not be considered as a service center business if services are provided to third parties.

Therefore, the licensee is not required to comply with the ESR tests. However, the licensee is required to file the notification for ESR.

17. What if a licensee engages in any relevant activities on a once-off basis i.e. the transaction is not in the ordinary course of its business?                                  

It is not required that a licensee should be engaged in any of the relevant activities on an ongoing basis for it to be considered as carrying on a relevant activity.

Therefore, the licensee is still required to submit the notification for ESR and comply with the ESR tests.

18. Where can I find out more information on relevant activities discussed under Q. 11-17? 

For more information, refer to the  Relevant Activity Guide  released by MoF.

19. What if a Licensee does not earn any income from the Relevant activity performed? 

The licensee is not required to comply with the ESR tests. However, the licensee is required to submit the notification for ESR.

20. What are the tests under ESR? 

There are three tests for ESR:

                ·         the relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE;

                ·         the Relevant Activity is being directed and managed in the UAE;

                ·         the entity should have adequate employees, premises and expenditure in the UAE.

21. What is the first reportable period under ESR? 

The Reportable Period is the financial period commencing from 01 January 2019.

For example- An entity having financial year starting 1 January 2019 to 31 December 2019, the reportable financial year under ESR will be 1 January 2019 to 31 December 2019.

22. Are entities in the liquidation process required to file ESR notification? 

The licensees that are in the process of liquidation are required to comply with the Economic Substance Notification requirement in respect of financial years ending on or before the completion of the liquidation process.

23. What are the reporting requirements for licensees under ESR? 

All the licensees in Hamriyah Free Zone are required to submit an annual notification under ESR including companies exempt from ESR (explained above). The ESR notification is to be filled through the e-services portal  here  .

The licensees who earn income from Relevant Activities during a particular financial year will also be required to file an annual report under ESR.

24. What details to be submitted under ESR notification? 

The following details are required to be submitted in the ESR notification:

                ·         General details around Trade license number, authorized signatory, and the financial year

                ·         Whether the licensee is carrying on a Relevant Activity

                ·         If yes; whether all or any part of the Licensee’s gross income in relation to the Relevant Activity is subject to tax is any other jurisdiction

                ·         If the licensee directly/ indirectly owned by Federal or Emirate level government.

25. Is a separate notification required for each licensee in Hamriyah Free Zone? 

Each licensee is required to file a stand-alone notification. A single notification cannot be filed for multiple licenses of the same entity or group.

26. What is the deadline for ESR report? 

The annual ESR report is to be filed within 12 months from the end of the financial year.

For example- If the financial year for a licensee ends on 31 December 2019, the ESR report is to be filed by 31 December 2020.

27. What happens if a licensee does not submit the notification? 

Non-compliance with the obligation to file an ESR notification within the deadline may be subject to a penalty under the UAE ESR laws spanning from AED 10,000 to AED 50,000.

28. What happens if incorrect or false information is recorded in the ESR notification/ report? 

Providing incorrect or false or misleading information in the ESR notification/ report form may attract penalties spanning from AED 10,000 to AED 50,000 under the UAE ESR laws. This can further result in the licensee being treated as having failed the ESR test for the relevant financial year.

29. What are the consequences of failure to meet ESR test? 

        ·         First year of failure

-        Penalty of AED 10,000 to AED 50,000; and

-        Information exchange with foreign competent authority of:

ü   parent company;

ü   ultimate parent company; and

ü   ultimate beneficial owner


        ·         Second consecutive year of failure

-        Information exchange with foreign competent authorities as above;

-        Penalty of AED 50,000 to AED 300,000; and

-        Suspension, revocation or non-renewal of the Commercial license.

30. Can Hamriyah Free Zone advise whether my Company is within the scope of ESR and whether I meet the tests? 

ESR is a self-assessing requirement. Hamriyah Free Zone is unable to make decisions on behalf of the licensees as Hamriyah Free Zone is the authority which will audit the notification and reports submitted by the licensees.

If you require further information or advise, please refer to the MoF website or contact professional advisors.


Note  : This document is meant to provide a better general understanding on frequently asked questions received from licensees. It is not intended to comprehensively address all scenarios which may arise. While Hamriyah Free Zone has taken the initiative to ensure that all information contained in this FAQ is correct, Hamriyah Free Zone will not be responsible for any mistakes or inaccuracies that may be contained, or any financial loss or other incurred by individuals using the information from this FAQ. All information is current at the time of preparation and is subject to change when necessary. 

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