The precise impact of Economic Substance Regulations (ESR) on a business can only be determined on a case-by-case basis, as the specific requirements depend on the company's activities. Every year, any entity undertaking a 'Relevant Activity'—as defined by the ESR framework—must file a report with the designated regulatory authority. For Indian businesses, this means that while ensuring compliance is essential for operating in the UAE, it also introduces a new layer of regulation that reduces the operational flexibility that existed prior to ESR's implementation.
By requiring the disclosure of revenues and costs associated with each function, the Regulatory Authority gains a transparent view of a company's performance. This requirement is designed to prevent businesses from artificially shifting profits without conducting genuine economic activities locally. Under ESR, companies must now report on the management, supervision, and employee levels connected to their Relevant Activities—a regulatory shift that significantly affects multinational groups from India.
Many multinational groups from India utilize third-party providers for certain functions; however, they must ensure these outsourced arrangements still satisfy ESR compliance standards. To align with the UAE’s substance requirements, Indian companies operating in the region may need to reform their governance models and operational structures. Making these adjustments is crucial for ensuring both regulatory compliance and the long-term viability of your business in the UAE.
