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Chapter Forty-Six: ESR Audit — what is the Process?

With the issuance of the new Cabinet Resolution No. 57 of 2020 concerning Economic Substance Requirements (“Regulations”) on 10 August 2020, the Federal Tax Authority (“the FTA”) becomes the National Assessing Authority.

The FTA’s functions include

  • Undertaking assessments to determine whether a Licensee has met the Economic Substance Test;
  • Imposing administrative penalties where applicable and,
  • Hearing and deciding on appeals.


The FTA has recently begun audits of UAE businesses to verify compliance with ESR regulations.

The FTA audit aims to assess whether the Licensee reported the applicable Relevant Activity and meets the economic substance requirements for each Relevant Activity. Hence, the documents required for the audit depend on the Relevant Activity reported in ESR submittals.

FTA requests some standard set of information during the audit process. The information requested is to review operational, financial, tax, transfer pricing, legal, and governance matters, including

  • A detailed and comprehensive explanation of the nature of operations and transactions, along with supporting documents (i.e., invoices, agreements, purchase orders, etc.);
  • Working papers for the calculation of the financial figures reported in the ES Report (e.g., relevant income, accounting profit/loss, etc.);
  • Board meeting minutes, resolutions, and agenda for board meetings;
  • Evidence that non-resident directors that formed the quorum were present in the UAE for board meetings (e.g., flight tickets, hotel expenses, etc.);
  • CVs of full-time employees or outsourcing agreements in case the Relevant Activity is outsourced;
  • Timesheets/biometric logs of full-time employees;
  • Working papers for calculation of full-time employees;
  • Details of physical assets in the UAE (including the cost of physical assets, accumulated depreciation, and accumulated impairment).
  • Floor plans for office/premises in the UAE;

You will need to get ready:

  • Carefully reviewing the Licensees’ factual situation vis-à-visthe provisions of the new ESR;
  • Identifying the ongoing economic substance obligations applicable to the Licensee and maintaining supporting documents to prove the same;
  • Providing accurate information in annual notifications and reports that are supported by the documents (e.g., number of board meetings, number of full-time employees and physical assets, etc.);
  • Providing financial figures as per the finalized working papers, preferable audited financial statements. In the absence of them, the provisional financial statements might suffice;
  • Appointing directors who can be physically present in the UAE when attending board meetings and making strategic decisions.


We strongly recommend that all UAE companies falling within the scope of ESR review their governance arrangement and put in place all necessary measures to comply with the ESR requirements.

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