ESR was introduced in 2019 in response to international pressure on the UAE's status as a low-tax jurisdiction. It applies to UAE businesses — including free zone entities — that carry out one or more of nine 'Relevant Activities': banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding company, intellectual property, and distribution and service centres. Businesses conducting these activities must file an annual ESR notification and, if they meet the 'relevant activity' test, an economic substance report demonstrating adequate income, employees, and expenditure in the UAE.
Watch out: ESR notifications are required even if you believe you do not have substance issues. Missing the notification deadline carries a penalty of AED 20,000 for the first year and AED 50,000 for subsequent failures.
See also: Compliance, Free Zone, Federal Tax Authority (FTA)
