UAE executed ESR through Cabinet Resolution No. 31 of 2019. Later on, ESR was updated by Cabinet Resolution No. 57 of 2020, to align with global tax standards set by the OECD and EU. These regulations necessitate entities involved in explicit activities to validate adequate economic presence within the UAE. In JAFZA known as Jebel Ali Free Zone, companies working in certain sectors are particularly affected. In this article, we will see the ESR in JAFZA.
What are the Key Objectives of ESR in JAFZA?
The key objectives of the ESR in JAFZA are intended to guarantee transparency and adherence. The prominent objectives are;
- ESR goals to prevent companies from affectedly shifting profits to jurisdictions with small or no taxation. It ensures that businesses are not manipulating tax advantages without conducting genuine economic activities.
- Entities have to validate real economic activity, such as local processes, employees, and tangible assets. It ensures compliance with ESR requirements and strengthens those businesses that are backing the UAE’s economy.
- ESR obligations bring JAFZA harmonized with international initiatives like the OECD’s Base Erosion and Profit Shifting (BEPS) framework and EU directives. It improves the UAE’s worldwide reputation.
What are the ESR Requirements for JAFZA Companies in the UAE?
The ESR Requirements for JAFZA Companies in the UAE are;
- Relevant Activities
The ESR applies to companies performing certain Relevant Activities in the UAE. Such Relevant Activities include;
- Banking
- Insurance
- Investment Fund Management
- Shipping
- Holding Company
- Lease-Finance
- Headquarters Businesses
- Intellectual Property Businesses
- Distribution and Service Centers
Any JAFZA entity involved in one or more of the above activities has to comply with the ESR obligations. These businesses must annually evaluate whether they meet the standards and stay compliant to fulfill the regulatory requirements.
- Economic Substance Test
The essential part of ESR compliance is when businesses pass the Economic Substance Test. To do so, JAFZA companies have to validate that they are accompanying substantial economic activity within the UAE. This Economic Substance Test includes the following key components;
- The company has to prove that the main revenue-producing activities related to its Relevant Activities are led in the UAE. The explicit CIGAs fluctuate depending on the scope of the business.
- JAFZA companies have also to prove that they have enough employees, offices, and physical assets in the UAE to conduct the Core Income Generating Activities. The meaning of “enough” depends on the size, scope, and density of the business.
- The company must sustain a suitable amount of working expenditure in the UAE associated with its Core Income Generating Activities. This assists in ensuring that the business has a physical and continuing presence in the country.
- Filing Requirements
Every JAFZA company that conducts Relevant Activities has to submit 2 types of reports to the relevant regulatory authority on an annual basis such as;
- ESR Notification
ESR Notification is an ephemeral report. It confirms whether the company has supported any Relevant Activities during the financial year. All businesses working in JAFZA, irrespective of whether they are involved in Relevant Activities, must submit this notification.
- ESR Report
If the business is involved in Relevant Activities and makes income from them, it also has to file a more comprehensive ESR Report. This report presents how the company passes the Economic Substance Test, as well as information about its CIGAs, management, employees, premises, and outlays.
- Exemptions
Some of the JAFZA entities may avail the benefit of exemption from the full scope of ESR, mainly those exclusively owned by UAE residents. These companies have to still file an ESR Notification. However, they are not mandatory to pass the Economic Substance Test or submit the comprehensive ESR Report. Also, companies that are unable to make income from Relevant Activities during the financial period are not exempted from filing a full ESR Report. However, it is important to note that they must still submit the Notification.
Conclusion
All qualified companies that are involved in relevant activities must follow the ESR guidelines in JAFZA. We offers one of the top ESR services in the UAE to all types of businesses. Some businesses may face issues in fulfilling the obligations of ESR in JAFZA.
