The Economic Substance Regulations (ESR) was introduced in the United Arab Emirates through the Cabinet Decision Number 31 of 2019. This regulation was implemented to reduce illegal tax practises and wrong doings in the business community. This regulation will put a stop to wrong tax practices followed in international business and will ensure that the correct amount of taxes is paid by the companies in the respective countries where the ultimate beneficial owner is based.
These regulations are applicable to all businesses, whether established onshore or in a free zone. These companies must comply with the regulations, or the business may have to face penalties and other consequences.
Overview of Economic Substance Regulation (ESR)
In a layman’s language, according to this regulation, a company will have to analyze the business activities being performed and then submit a report stating if the ‘Relevant Activities’ mentioned in the regulation are being performed by the business or not.
The three basic steps to be taken by a business according to the Economic Substance Regulation are given below:
- The business should notify the relevant authority about the business activities being performed by the company and if any relevant activities are being performed by the business. This report should be provided before the 30th of June 2020. If it is identified that company is not doing any relevant activity, then no need to go to step 2 and 3.
- For those who do relevant activity, the second step is to perform an economic substance test, which will test if the required criteria have been met by the business or not. the management of the company must submit a report to the concerned authority with information like the revenue received from the relevant activity, it’s corresponding cost, details of staff, details of office etc. This report must be submitted to the authority before 31st December.
Read our blog to know more about the ‘Things which should be disclosed according to the Economic Substance Notification.’
The Impact of ESR on Businesses
The Economic Substance Review will have great impacts on the businesses in the United Arab Emirates. The impact will include the following:
·Fulfill the “Economic Substance Test”
A licensee undertaking a relevant activity must satisfy the Economic Substance Test in relation to that relevant activity by:
- Conducting the Core Income- Generating Activity (“CIGA”) in the UAE;
- Being directed and managed in the UAE in relation to that activity;
- Having an adequate number of full time employees in relation to that activity who are physically present in the UAE or an adequate level of expenditure on outsourcing to third party service providers, whose activities, employees, expenditure and premises are in the UAE; and these activities, employees, expenditures and premises are adequate for carrying out the relevant activity outsourced.
- Having an adequate operating expenditure incurred by it in the UAE , or an adequate level of expenditure on outsourcing to third party service providers whose activities, employees, expenditure and premises are in the UAE; and these activities, employees, expenditures and premises are adequate for carrying out the relevant activity being outsourced.
- Having adequate physical assets in the UAE or adequate level of expenditure on outsourcing to third party service providers in the UAE, for the activities of the license;
- Monitoring and controlling the carrying out of CICG where it is carried out for the relevant licensee by another entry.
·Providing Regular and Accurate Reports
Providing accurate reports to the concerned authority plays a very important part according to the Economic Substance Regulations. Every company is obligated to provide annual or bi-annual reports depending upon the business activities being performed in the company. Every company needs to prepare a notification stating if the ‘Relevant Activities’ are being performed in the company or not. The above mentioned notification needs to be submitted by the 30th of June.
If the answer is “Yes,” then yearly return need to be submitted to the authority before 31st December.
·Liquidation and Deregistration of Companies
If the company repeatedly does not comply with the Economic Substance Regulations or continuously fails in providing the relevant information or meeting any criteria of as mentioned in the regulation, then the entity’s license may not be renewed, or in some cases, the company may have to go through with the Liquidation of the company. This will have a great influence on the economy of the country. This will also keep the management of the company on toes so as not to make any mistakes or not provide any wrong information which will hamper the working of the business.
·Transparent Tax Information
The implementation of ESR will force the companies to use the legal and correct method of doing business. The companies will have to provide the correct financial information and may have have to pay additional taxes.
·Better Business Competitors
The implementation of ESR will help reduce the companies which conduct wrong and illegal business practices and will pave the way for the companies which are better and do the business the right way. This will help generate healthy competition between the companies, which will, in turn, help increase profitability.
The ESR holds great importance and will have a huge effect on the business in the United Arab Emirates. It will affect the businesses in a positive way, but the management has to be extra careful and provide the correct and relevant information about the company at the correct time. This is where a business should take assistance from a third party.
If you are looking for such a financial consultancy firm in the United Arab Emirates that will understand and analyze your business and provide customized solutions for your business, then you should have a look at the services provided by JAXA Chartered Accountants. The experts at JAXA also aims to provide the best services at a competitive price. For more information on the services provided by JAXA, Contact Us. We will be happy to provide answers to all your questions.