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Chapter 2- Exercise 1: ABC Ltd. in DIFC – Is It Subject to ESR?

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Chapter 2- Exercise 1: ABC Ltd. in DIFC – Is It Subject to ESR?

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ABC Ltd. is a company registered in the Dubai International Financial Centre (DIFC). It provides investment advice and portfolio management services to global clients, including high-net-worth individuals and institutional investors.

Key Facts:

Activity Conducted: Investment Fund Management (a Relevant Activity under ESR).

Location: DIFC (a UAE free zone).

Clients: Global (not limited to UAE).

Operations:

·       5 full-time employees based in DIFC.

·       Physical office in DIFC with operational infrastructure.

·       Board meetings held in Dubai.

Required:

(a)    Is ABC Ltd. subject to the UAE’s Economic Substance Regulations (ESR)?

(b)   What if ABC Ltd. had only 1 part-time employee and a virtual office?

(c)    Would ABC Ltd. still need to comply if all clients were outside the UAE?

(d)   What penalties could ABC Ltd. face if it fails to comply?

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Yes, the company meets all 4 steps of the ESR checklist:

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Yes, the company meets all 4 steps of the ESR checklist:

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It carries on a Relevant Activity (investment fund management).

It is a licensed company registered in the DIFC.

It is not exempt, since it operates globally.

It is managed in the UAE – board meetings are in Dubai, it has 5+ employees, and a physical office with infrastructure in DIFC.

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ABC ltd is located in DIFC. a company of international financial investment where it provides advices to all individuals including high income people to with no limited nationalities to enhance higher incomes

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(a) Is ABC Ltd. subject to ESR?	Yes, it conducts a Relevant Activity in DIFC with physical presence and employees.

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(a) Is ABC Ltd. subject to ESR?	Yes, it conducts a Relevant Activity in DIFC with physical presence and employees.

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(b) Only 1 part-time employee & virtual office? No, likely fails ESR substance requirements due to inadequate people and premises.

(c) If all clients are outside UAE? Yes, ESR applies regardless of client location.

(d) Penalties for non-compliance? Administrative fines AED 10,000–50,000+, plus reputational and regulatory risks.

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(a) Is ABC Ltd. subject to ESR?

Yes.

It does Investment Fund Management, which is a Relevant Activity.

So, it must follow ESR rules.

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a) Yes, ABC Ltd. is subject to ESR as it conducts Investment Fund Management (a Relevant Activity) and is registered in DIFC. It must file an ESR Notification and, if required, an ESR Report to show adequate staff, office, and management in the UAE.

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ABC Ltd company meets the rules to pass ESR. First the company is considered a relevant activity as they conduct investment fund management. The company is registered in the Dubai International Financial Centre making it licensed. ABC Ltd clients are not limited to UAE only which mean they are not exempted. The company own a physical office in DIFC with operational infrastructure that indicate they are managed in the UAE. Moving to the next step the company employed 5 full time workers which mean they pass ERS. The company provides investment advice and portfolio management services to global clients as their core income. Lastly for sufficient expenditure the company , includes high-net-worth individuals and institutional investors.

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Chapter 2- Exercise 2: XYZ Shipping LLC – Is It Subject to ESR?

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Chapter 2- Exercise 2: XYZ Shipping LLC – Is It Subject to ESR?

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XYZ Shipping LLC is a Dubai-based logistics and shipping company registered in Jebel Ali Free Zone (JAFZA). It owns a fleet of cargo ships that transport goods between Asia, Europe, and the Middle East.

Key Facts:

Activity Conducted: Shipping (a Relevant Activity under ESR).

Location: JAFZA (UAE free zone).

Operations:

3 full-time employees in Dubai (management, logistics).

Ships registered under the UAE flag but operated by a third-party crew.

Most contracts are signed in Dubai, but day-to-day ship operations are managed remotely.

Required:

(a)    Is XYZ Shipping LLC subject to the UAE’s Economic Substance Regulations (ESR)?

(b)   What if XYZ Shipping had 20 employees in Dubai managing all operations?

(c)    Would UAE-flagged ships alone satisfy ESR?

(d)   What penalties could apply if XYZ Shipping fails ESR?

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Question 11). What are the main purposes of federal taxation in the UAE?

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Question 11). What are the main purposes of federal taxation in the UAE?

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Q11)The main purposes of federal taxation in the UAE are to reduce dependency on oil income, provide money for public services like healthcare, education, and infrastructure, and make the economy more stable. Taxes also help the UAE follow international rules, create fairness between businesses, and attract more investors.

Q12)Direct taxes are paid straight to the government on income or profit, like the Corporate Tax (9% on company profits). Indirect taxes are paid when buying goods or services, and businesses collect them on behalf of the government, like VAT (5%) and Excise Tax on tobacco or energy drinks. The key difference is direct taxes affect income, while indirect taxes affect spending.

Q13) The Federal Tax Authority (FTA) has the power to register businesses for taxes, collect tax money, check company records, and do audits. It can also give tax guidance, apply fines if rules are broken, and help solve disputes. In short, the FTA makes sure taxes are managed and enforced properly in the UAE.

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12). Differentiate between direct and indirect taxes with the help of examples from UAE Taxation System. 

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12). Differentiate between direct and indirect taxes with the help of examples from UAE Taxation System. 

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13). Identify the powers that the Federal Tax Authority may exercise in administering and enforcing federal taxes in the UAE. 

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13). Identify the powers that the Federal Tax Authority may exercise in administering and enforcing federal taxes in the UAE. 

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14). Differentiate between tax evasion and tax avoidance. 

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14). Differentiate between tax evasion and tax avoidance. 

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15). If a taxable person disagrees with the FTA tax assessment or outcome of FTA audit, what options can it exercise to resolve the dispute? Explain in detail   

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15). If a taxable person disagrees with the FTA tax assessment or outcome of FTA audit, what options can it exercise to resolve the dispute? Explain in detail   

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Chapter 2- Exercise 3: Tech Innovations Ltd. – Intellectual Property (IP) & ESR

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Chapter 2- Exercise 3: Tech Innovations Ltd. – Intellectual Property (IP) & ESR

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Tech Innovations Ltd. is registered in Ras Al Khaimah (RAK) Free Zone and holds patents for AI software. It licenses these patents to tech companies in Europe and Asia but has:

No R&D team in the UAE (development is outsourced to India).

No full-time UAE employees (only a registered agent).

No physical office (uses a virtual desk in RAK).

Required:

(a)    Is Tech Innovations Ltd. subject to ESR, and does it meet the Economic Substance Test?

(b)   What if Tech Innovations hired 2 UAE-based developers?

(c)    Would registering patents in the UAE help?

(d)   Could it restructure to avoid ESR?

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q1 : To reduce reliance on oil – The UAE used to get most of its money from oil, but taxes help the country earn money in new ways.

q2: the meaning its the tax that you pay straight to the gov from your profit this the direct

example: uae pay 9% if there profit more 375,000

this tax add to the price of good and service , you pay when u buy thing

example: 5% add like restaurant

q3: collect and recive tax

auditing and inspecting

q4:Tax avoidance is legal.

Tax evasion is illegal.

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Chapter 2- Exercise 4: Global Bank DIFC Branch – Banking & ESR

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Chapter 2- Exercise 4: Global Bank DIFC Branch – Banking & ESR

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A foreign bank’s DIFC branch serves high-net-worth clients in the Middle East. It has:

50 employees in DIFC.

A physical office.

Local risk management and compliance teams.

Required: Does it meet ESR requirements?

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Chapter 2- Exercise 5: Luxury Goods Trading LLC – Distribution & ESR

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Chapter 2- Exercise 5: Luxury Goods Trading LLC – Distribution & ESR

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A Dubai-based company distributes European luxury goods across GCC. It has:

• 10 employees.

• A JAFZA warehouse.

• Sales contracts signed in Dubai.

Required: Is it subject to ESR?

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(a) I think Tech Innovations Ltd. is subject to ESR because it earns income from Intellectual Property, which is a Relevant Activity. But I believe it does not meet the Economic Substance Test since it has no R&D team, no employees, and no physical office in the UAE.

(b) I feel hiring 2 UAE-based developers would improve its chances of meeting ESR, as it would show real activity happening in the UAE.

(c) I believe registering patents in the UAE helps, but it is not enough by itself. The company still needs people, expenses, and decision-making based here.

(d) I think it could restructure by moving some R&D to the UAE, hiring staff, or setting up proper operations to meet ESR requirements or reduce exposure.

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ABC company is under ESR  because it does Investment Fund Management  Since it has employees, an office, and board meetings in Dubai, that showed ABC company meets ESR requirements.

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Yes, Tech Innovations Ltd. is subject to ESR (IP business). It fails the Economic Substance Test because R&D, management, employees, and premises are outside UAE.

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1. Need to comply with ESR?

Yes. Consultancy services are a Relevant Activity under UAE ESR.

ABC Ltd. must file ESR notification and report, even with only 1 employee and remote work.

2. If failed the EST:

Disclose failure in ESR return.

Provide reasons for failure.

Take corrective steps (hire more staff, rent office, incur UAE expenses) to meet requirements in future.

3. Penalty for missing reporting deadline:

AED 20,000 for failure to file notification.

AED 50,000 for failure to submit report.

Higher penalties (up to AED 400,000) for repeated non-compliance.

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1. Check your activity
– See if your company does a “Relevant Activity” under ESR rules.

2. Show real business work
– Make sure you have staff, office, and spending in the country.

3. Send ESR notification
– Every year, tell the regulator if you did a Relevant Activity.

4. Submit ESR report
– If you did, send a report with accounts, staff details, and expenses.

5. Keep records
– Save documents and minutes of meetings for at least 6 years.

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1. Did ABC Ltd. need to comply with ESR?

Yes, because consultancy is a relevant activity under ESR.

2. If it failed the EST, what steps should it take?

Show work done in UAE (staff, office, or outsourcing).

Keep records of activities.

File ESR report with explanation.

3. Penalty if missed reporting deadline?

AED 20,000 → if Notification not filed.

AED 50,000 → if Report not filed or late.

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1. Check if your business is covered – See if your company does any of the 8 ESR activities (like IP, holding, shipping).

2. Make sure your company has enough UAE presence – Have staff, an office, and management in the UAE to actually run the business.

3. Keep proof – Write down decisions, meetings, and employee work to show you are managing the business in the UAE.

4. Send the ESR Notification – Tell the authorities you have a Relevant Activity.

5. Submit the ESR Report (if needed) – Give detailed information showing you follow the ESR rules.

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Check activity

subetence test

Submit report on time

Managed in UAE

Office ، employees ، expenses

Keep records

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1-Check if my company does any of the ESR “relevant activities.”

2-Submit the ESR notification every year.

3-Make sure the company has enough substance in the UAE (staff, office, expenses, meetings).

4-File the ESR report if the company earns income from relevant activities.

5-Keep records and proof to show compliance if asked.

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1- Determine whether the organization engages in a pertinent activity.

2-Verify whether ESR regulations are relevant or if any exemptions apply.

3-Submit the ESR notification promptly.

4-If necessary, submit the ESR report.

5-Maintain documentation and proof to demonstrate adherence

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File the Annual Notification

Every company must submit it yearly, even if they don’t have relevant activities.

Check for Relevant Activities

See if your business does things like banking, insurance, shipping, or intellectual property.

Submit Detailed ESR Report (if needed)

Only if you have relevant activities. Show how the company meets the rules.

Show Economic Substance

Make sure main business activities happen in the UAE.

Have enough staff, money spent, and management in the UAE.

Keep Records for 6 Years

Save all documents to prove compliance if asked

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a) ESR Compliance steps for 2022:

1. File ESR Notification to the Ministry of Finance.

2. Prepare and submit the ESR Report for 2022.

3. Maintain documentation to show activities, income, and expenses related to the IP business.

b) Economic Substance Test (EST) for IP Holding Business:

XYZ Tech earns income from software licensing (IP-related).

Since R&D is outsourced and it only has 3 staff managing contracts, this may not be enough for a High-Risk IP Business (where core IP functions should be conducted in the UAE).

Therefore, it is unlikely to meet the EST, unless it can prove UAE-based decision-making and adequate control over outsourced R&D.

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a) Outline XYZ Tech’s ESR compliance steps for 2022.

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a) Outline XYZ Tech’s ESR compliance steps for 2022.

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1. Identify Relevant Activity

o qualifies as an Intellectual Property (IP) Business.

2. Notify the Regulatory Authority

o File Economic Substance Notification with the UAE Ministry of Finance

o Keep documentation to demonstrate:

 Directed and managed in the UAE

3. File Economic Substance Report

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Understanding Corporate Tax in the UAE - Details - Kahoot!

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Understanding UAE Tax Residency - Details - Kahoot!

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Ex2:

Jao Company will be treated as a UAE Tax Resident under UAE Corporate Tax law because its effective management and control are exercised in the UAE by Mr. Jao.

Ex4:

DK Company is a UAE tax resident for Corporate Tax purposes because the board of directors, residing in the UAE, makes key management and commercial decisions there, albeit under the influence of Mr. DK. The absence of a DTA means potential double taxation exposure.

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Jao Company is an UAE tax resident for Corporate Tax purposes because the key economic and commercial decisions are effectively made in the UAE by Mr. Jao, even though the company is incorporated abroad.

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Jao Company as UAE tax resident for Corporate Tax purposes because the key economic and commercial decisions are effectively made in the UAE by Mr. Jao, even though the company is incorporated abroad.

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Understanding CT Registration - Details - Kahoot!

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Be heard, collaborate, and share ideas—make meetings and classes more engaging with real conversations.

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Application Filed Promptly The company must submit a deregistration application to the FTA within 3 months from the date it ceased business (i.e., by 31 March 2026).

Final Corporate Tax Return The company must file its final tax return for the last tax period (1 January 2025 – 31 December 2025).

Payment of Outstanding Liabilities The company must pay all corporate tax due, including any penalties or interest.

Clearance from FTA Deregistration will only be approved once the FTA is satisfied that there are no pending tax liabilities.

Corporate Tax due for 2025 Tax is 0% on the first AED 375,000 of taxable income and 9% on the rest.

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UAE Small Business Relief Quiz - Details - Kahoot!

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Understanding Interest Expenditure - Details - Kahoot!

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Mastering Tax Losses and Relief: Essential Concepts Quiz - Details - Kahoot!

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1. What is the maximum percentage of taxable income that can be offset by carried-forward tax losses each year under UAE corporate tax law?

2. Under what conditions can tax losses be transferred between companies within a qualifying group in the UAE?

3. How does a change in shareholder ownership affect the ability to carry forward historical tax losses in the UAE?

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Understanding UAE Corporate Tax: Tax Loss Provisions Explained