The Economic Substance Regulation (ESR) Reporting has been recently introduced and implemented in the United Arab Emirates. The ESR Reporting is a step taken by the government in order to combat the tax-related frauds which happen by various companies in the country. According to the ESR Reporting, all the companies must notify the relevant authority if the Relevant Activities are being performed by the business or not.
Let us know more about Economic Substance Regulations (ESR) Reporting in the UAE.
What is Economic Substance Regulations Reporting and What is its Purpose?
In the year 2019, the UAE government introduced the Economic Substance Regulations, which will apply to all the jurisdictions, both onshore and offshore. Collectively this legislation was referred to as Economic Substance Regulations. The legislation was introduced as a response to the inclusion of The United Arab Emirates into the List of the European Union about the Non-Cooperative jurisdictions for tax purposes.
This regulation was introduced in the United Arab Emirates with the aim to provide greater transparency in the matters of taxation and also to ensure that there is a fair and healthy tax competition in the country. The regulations will ensure that the business entities in the United Arab Emirates report the correct amount of profits gained by the said economic activity conducted by them.
To which entities does the Economic Substance Regulations Apply?
The Economic Substance Regulations are applicable to all the Licensees in the UAE, which includes any and every Natural or Legal person. This will include all onshore and free zone companies, foundations, branches, partnerships and non-profits organizations which carry out one or more of the “Relevant Activities”.
A list of the relevant activities is provided below:
- Insurance Businesses
- Banking Businesses
- Lease or Finance related Businesses
- Investment Fund Management Businesses
- Distribution and Services Centre Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Shipping Businesses
- Headquarters Businesses
Each of the business activity mentioned above has been explained both the Economic Substance Regulation as well as in the ESR Relevant Activities Guide, which was issued by the Ministry of Finance in the United Arab Emirates.
A company needs to follow three steps to comply with the latest Economic Substance Regulations (ESR). These steps are :
- To submit notification whether the company conducts any of the ‘Relevant Activities’. This notification should be submitted before June 30, 2020.
- Test whether you meet the criteria as mentioned in the Regulation about the Economic Substance. If not, then your company will face penalties.
- After meeting all the criteria, the management of the company needs to submit the Economic Substance report before December 31, 2020.
If the company does not conduct any activity mentioned in the related activities, then their scope in ESR finishes at this point, but in case the answer is yes then they need to perform step two and three.
Economic Substance Regulations in Dubai Multi Commodities Centre (DMCC)
It is required in the Dubai Multi Commodities Centre (DMCC) to submit the notification about the relevant business activities which are being performed by the company. It is a legal requirement for the business to provide this notification to the management of the DMCC under the ESR Regulations. Each of the member company will receive a request through the DMCC Portal to complete the notification related to the activities. This is Economic Substance Reporting in the DMCC.
The Notification must be completed by all members incorporated on or prior to 31 December 2019 and must be submitted by no later than 30 June 2020. Any failure in the completion of the notification will lead to penalties as set by the ESR Regulations.
In the Cabinet Resolution No. 58/2019, it has been mentioned that the DMCC Authority will be considered as the regulatory authority for all the businesses which have been established in DMCC Free Zone. The DMCC Authority will pass on the ESR information of its member companies to the Ministry of Finance (MoF) UAE.
Penalties in case of Non-Compliance.
As per Article 6 of this resolution, a licensee must meet all the requirements of the Economic Substance Test. In case the criteria set in the resolution is not met, then the following penalties are levied on the business:
- A penalty not less than 10,000 dirhams (AED 10,000) but no more than 50,000 dirhams AED 50,000) shall be imposed on the business in case the company fails to notify the Authority.
- If the management of the company fails to provide complete information about the company, then a penalty is levied, which ranges from AED 10,000 to AED 50,000.
- If the company fails to show any Economic Substance or fails to show an adequate amount of Economic substance, then the following penalties will be levied upon the business:
- Penalty for the first year
- Penalty ranging from AED 10,000 to 50,000
- Exchange of the information with a foreign Competent Authority
- Of the Parent Company
- Of the Ultimate Parent Company
- Of the Ultimate Beneficial Owner
- Penalty for the second year
- Information Exchange of
- The Parent Company
- The ultimate Parent Company
- The ultimate Beneficial Owner
- Information Exchange of
- Penalty for the first year
- A penalty ranging from AED 10,000 to AED 30,000
- The commercial licence of the company can be withdrawn, suspended or not renewed
If the licensee feels that it has been wrongly judged, then an appeal can be made according to Article 13 of the resolution.
This shows that there is a big need for understanding the ESR requirements and compiling to its requirements. This regulation has been introduced in the best interest of the licensees, and it is now the turn of the legal entities to provide the correct information to the different authorities.
It is preferred that the businesses avail the services of a business consultant which will not only assist in all the matters relating to ESR but will also help in the day to day financial activities of the business. Apart from ESR reporting a business consultant can provide services in different aspects such as Accounting, Auditing, Payroll, Tax related services and many more.
If you are in search of such a business consultant in the UAE who will help you to file your ESR report, then JAXA Chartered Accountants can help you in this matter. the experts at JAXA will take care of all the compliance requirements and will provide the best services possible at an affordable price. For more details on our various services, Contact Us. We will be happy to answer your queries.