In a significant regulatory update, the UAE has canceled the Economic Substance Regulations (ESR) reporting requirements for financial years beginning on or after January 1, 2023. This change was introduced by Cabinet of Ministers Decision No. (98) of 2024, replacing the earlier ESR obligations set by Decision No. (57) of 2020. The update is expected to streamline compliance for UAE businesses, particularly those that had been bound by extensive ESR requirements over recent years.
Key Amendments and Implications for Businesses
- Revised Applicability Periods
Under the new ruling, ESR compliance now applies only to financial years from January 1, 2019, to December 31, 2022. Reporting obligations no longer apply to financial periods from 2023 onward, simplifying compliance for businesses operating in the UAE.
- Cancellation of ESR Penalties
Administrative penalties previously imposed under the former ESR regulations have been canceled for financial years ending after December 31, 2022. This provides significant relief for many companies, especially those that struggled to meet past compliance standards.
- Refunds for Previous Penalties
The Federal Tax Authority will refund administrative penalties applied to entities for financial years ending after December 2022. This decision also extends to terminate any grievances or appeals that were previously filed against these penalties.
- Corporate Tax Compliance for Free Zone Businesses
Although ESR reporting requirements have been canceled, UAE free zone businesses seeking a 0% corporate tax rate as Qualifying Free Zone Persons still need to demonstrate “adequate substance.” This involves conducting core income-generating activities within the free zone, employing a sufficient number of staff, and incurring a reasonable level of operating expenses within the zone. Ensuring compliance with these requirements is essential to benefit from the 0% tax rate.
Steps for Businesses Moving Forward
With these new changes, businesses must still meet ESR obligations for past reporting periods (2019–2022). Key steps include:
- Complete ESR Filings for 2019–2022: Businesses with outstanding ESR reporting for this period should ensure all ES Notifications and Annual Reports are submitted promptly.
- Assess Adequate Substance for Free Zone Compliance: Free zone entities should evaluate their current structures to meet corporate tax requirements, focusing on maintaining adequate local assets and staffing.
- Verify Eligibility for Penalty Refunds: Entities eligible for penalty refunds should consult with ESR advisors to ensure they receive due reimbursements.
- Stay Updated on Further Developments: Businesses should monitor regulatory updates to remain informed on compliance and penalty waiver procedures.
The UAE’s cancellation of ESR requirements for the 2023 fiscal year and beyond reflects a broader effort to simplify compliance while ensuring robust economic substance standards remain intact, particularly for free zone entities.
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