Navigating the Removal of ESR Regulations in the UAE

Since the beginning of the rapid economic rise of the UAE, it has been recognized as a global hub for business and investment. The continually evolving regulatory environment fosters economic growth and international investment. In 2019, the UAE introduced ESR (Economic Substance Regulations) laws, aimed at ensuring that business was being conducted within the country in real terms, not simply for tax or other purposes.

In 2024, the UAE reversed this decision for all financial years ending after January 1 2023 in a move that is likely to be connected to the new Corporate Tax requirements recently introduced. Here, we’ll explore the implications of this regulatory change for businesses in the UAE navigating corporate tax compliance. 

What does the removal of ESR in the UAE mean for businesses?

First, and most importantly, it reduces the administrative burden on companies, making compliance more straightforward. For certain business types and industries, proving their business activity is no longer necessary, which also makes the UAE a more attractive place to conduct business. 

How does removing ESR affect businesses' corporate tax compliance obligations in the UAE?

Removing ESR and adding Corporate Tax laws reduces the administrative burden on companies, while maintaining transparency and accountability, and preventing tax evasion. Businesses will still need to declare income accurately and maintain proper documentation, and, where applicable, submit to audits. But by having only one set of requirements, businesses can focus better.

What were some challenges in complying with ESR, and how does their removal alleviate them?

ESR presented businesses with challenges related to the time-consuming nature of documentation, the burden of proof of economic activities, and an uncertainty related to how to interpret the regulations. 

Now that they have been lifted, it should have the effect of reducing the administrative burden, reducing complexity related to compliance, and eliminates the need to demonstrate economic substance. 

What reporting requirements remain for businesses in the UAE?

To ensure transparency and accountability, and prevent tax evasion, businesses in the UAE are required to be compliant with the following laws and regulations:

• Corporate Tax Law: Requires detailed financial records and accurate income reporting.
• Transfer Pricing Regulations: Prevents profit shifting.
• CRS/CbC: International agreements for information exchange.

These frameworks are deemed sufficient for keeping businesses accountable to the UAE tax authority, while keeping the administrative burden to a minimum.

Are all businesses and industries equally affected by the removal of ESR?

ESR applied to businesses certain sectors (banking, insurance, investment fund management, lease-finance, and shipping, as well as headquarters, holding companies, and distribution and service centres). Those sectors will see the most alleviation of compliance requirements, but we believe all businesses will benefit from a more streamlined regulatory environment.

How should businesses align their policies in a post-ESR regulatory environment?

We always recommend that businesses keep their regulatory policies up to date with any changes, and are available for consultation if needed. All businesses operating in the UAE should maintain proper documentation, ensure that they are compliant with tax regulations, and review and update any relevant policies internally.

How can Swift Audit assist businesses as they navigate regulatory changes like this?

With plenty of experience and first-hand knowledge available, Swift Audit is ideally placed to help businesses in a variety of ways. We can provide expert advice on compliance requirements, both pre- and post-ESR, as well as relating to the new Corporate Tax. Our consultants can review and update compliance policies, as well as assisting with putting the right systems and controls into place to ensure compliance with the relevant laws and regulations. 

Our team of professionals is available to help with compiling and filing Corporate Tax returns, as well as assisting with the ongoing maintenance of documentation necessary for compliance. Our team also offers comprehensive tax and business advisory services to help your business with any needs relating to these changes.

Get in touch for professional guidance through ESR-related compliance

Swift Audit is ideally placed to assist your business with adjusting to a post-ESR regulatory environment. Get in touch with us with any questions you have. Our team would be happy to help.