In recent years, the European Union’s impact on global tax regulations has extended to the United Arab Emirates (UAE). Embracing its commitment to the OECD’s Inclusive Framework, the UAE has implemented the Economic Substance Regulations (ESR), significantly affecting businesses within its Free Zones and Financial Free Zones, including the prominent Abu Dhabi Global Market (ADGM).
Let’s delve into the specifics of ESR in the ADGM, providing a comprehensive guide for businesses exploring these new regulatory waters.
Who is affected by ESR in the ADGM?
ESR applies to ADGM Licensees, which are essentially legitimate businesses and unincorporated groups registered with a competent authority and engaged in specific activities defined by the ESR. These activities are broadly categorized as Relevant Activities.
Relevant Activities covered by ESR in the ADGM
Here’s a list of business sectors in ADGM that fall under the ESR purview:
- Financial Services Industry (Banking, Insurance, etc.)
- Investment Fund Management
- Lease-Finance Industry
- Headquarters Businesses
- Shipping Industry
- Holding Companies
- Intellectual Property Businesses
- Distribution and Service Center Businesses
What are the ESR requirements for ADGM Licensees?
If an ADGM Licensee conducts any of the Relevant Activities and generates income from them, they must pass the ESR Test as mandated by the regulations. This essentially demonstrates that the business has a genuine economic presence in ADGM.
Understanding the Reportable Period
The ESR regulations define a Reportable Period as the accounting reference period or financial year for which an ESR Notification needs to be filed. This period should ideally match the timeframe for which the Licensee prepares its financial statements (if applicable).
Filing ESR Notifications and Reports
ESR Notifications and Reports must be submitted electronically through the Ministry of Finance’s dedicated ESR portal. It’s crucial to note that the Registration Authority won’t approve any ESR submissions filed outside this portal, potentially leading to legal repercussions.
Annual Filing of ESR Notification
ADGM Licensees, including those categorized as Exempt Licensees, who engage in Relevant Activities are obligated to file an ESR Notification within six months of the Reportable Period’s end. Failing to do so or submitting it after the deadline can attract penalties from the Federal Tax Authority (FTA).
ESR Reporting Requirements
Licensees who qualify for an ESR exemption but still conduct a Relevant Activity that generates revenue must undergo the ESR test and submit an ESR Report within a year from their fiscal year-end. Similar to the Notification, missing the deadline for filing the Report can invite penalties from the FTA. ESR applies to all businesses operating in ADGM that conduct Relevant Activities. This includes ADGM foundations, which would also be required to comply with the ESR regulations.
Understanding ESR Exemptions for ADGM Licensees
Even if an ADGM Licensee engages in a Relevant Activity, they might be exempt from filing an ESR Report. Here’s a breakdown of who qualifies for exemption:
- Businesses wholly owned by UAE citizens or residents, operating solely within the UAE and not affiliated with a Multi-National Enterprise (MNE) group.
- Entities dealing exclusively with investment reserves as defined by UAE laws.
- Branches of foreign companies where all Relevant Income generated in the UAE is subject to tax in the foreign company’s jurisdiction.
- Special Purpose Vehicles (SPVs) or Investment Holding Companies relevant to Investment Funds as per the ESR definitions.
- Businesses that are tax residents in a jurisdiction outside the UAE.
ESR Filing Deadlines
The ESR regulations mandate that ESR Reports be filed within twelve months of the Reportable Period’s end, whereas ESR Notifications have a deadline of six months from the same period’s end.
Understanding and complying with ESR requirements are crucial for businesses operating in ADGM, especially those engaged in the defined Relevant Activities. By familiarizing yourself with the regulations, filing deadlines, and exemption criteria, you can ensure your business operates smoothly and avoids potential legal or financial consequences.
How MS can help with ESR in the ADGM
Businesses in the Abu Dhabi Global Market (ADGM) that engage in Relevant Activities must comply with the Economic Substance Regulations (ESR). Missing ESR filing deadlines can result in penalties. MS can help you navigate the entire ESR process. Our services include determining if your activities are relevant, simplifying the filing process, and ensuring compliance to avoid penalties. Don’t let ESR compliance be a burden. Partner with MS to safeguard your business’s future and financial well-being.