Economic Substance Report (ESR)

The ESR (Economic substance report or regulations) is critical if you’re planning to begin any business in any country. The main idea behind the ESR is transparency and the way to permit businesses to provide their information.

An Economic Substance Report (ESR) is a document that certain businesses are required to submit to their tax authorities. The ESR provides information about the business's activities and how it meets the economic substance requirements of the jurisdiction in which it operates.

The idea behind the ESR is to combat tax avoidance by ensuring that businesses have a genuine economic presence in the jurisdictions where they are taxed. Economic substance requirements typically include having a physical presence, employees, and expenses in the jurisdiction.

ESR regulations are now in place in many jurisdictions around the world, including the United Arab Emirates, Bahrain, and the European Union. The specific requirements vary from jurisdiction to jurisdiction, but they all share the same goal of ensuring that businesses are paying their fair share of tax.

The ESR is typically due within 12 months of the end of the business's financial year. Failure to file an ESR on time or to meet the economic substance requirements can result in a number of penalties, including fines, tax assessments, and even the revocation of the business's trade license.

ESR in Bahrain

In order to meet the European Union criterion 2.2 and Base erosion and profit shifting (BEPS) Action 5 minimum standard, the Kingdom of Bahrain is required to impose economic substance requirements on entities that carry on geographically mobile business activities.

European Union criterion 2.2

No facilitating of offshore structures (criterion 2.2)

Jurisdictions should not facilitate offshore structures or arrangements seeking to attract profits without any real economic activity. This criterion concerns jurisdictions that have no or very low corporate income tax.

Base Erosion and Profit Sharing (BEPS)

Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions or no-tax locations where there is little or no economic activity