What does one mean when a Company is being subjected to Economic Substance Regulations in the United Arab Emirates?
If a business entity earns income from a “Relevant Activity” which have ben specified, they need to take part in an Economic Subsance Test which will help in clarifying the following points:
- The “Relevent Activity” is being conducted and managed in the Country.
- All the relevant Core Income Generating Activites (CIGA) are conducted in the Country.
- The business entity files an Economic Substance Return witin 12 months of the end of the Financial Year in the country.
Which Entities need to Abide by the Economic Substance Regulations?
Any and all business entities which are present Onshore, any Freezone companies or any other UAE business which take part in and conduct the following "Relevent Activites" need to follow ESR as mentioned by the government regulations. The "Relevent Activities" are:
- Insurance Busines
- Shipping Business
- Intellectual Property Business
- Lease-Finance Business
- Investment Fund Management Business
- Headquarter Business
- Holding Company Business
- Distribution and Servcie Centre Business
- Banking Business
For more details Read: What are the Relevant Activities according to Economic Substance Regulations (ESR)?
What are the penalties to be faced in case of Non-Compliance of ESR in the country?
As per the amended Cabinet Decision Article, a licensee must meet all the requirements of the Economic Substance Test. The Changes made in the penalies after the amendment are mentioned below:
- A fixed penalty of 20,000 dirhams (AED 20,000) shall be imposed on the business in case the company fails to notify the concerned Authority.
- If the management of the company fails to provide complete information about the company then a penalty is levied, which can go up to a maximum of 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 up to AED 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 and Subsequent years
- Penalty up to AED 400,000
- Information Exchange of
- The Parent Company
- The ultimate Parent Company
- The ultimate Beneficial Owner
- The commercial licence of the company can be withdrawn, suspended or not renewed
Who should file an Economic Substence Return and by When?
Only the business entities which earn income from the Relevant Activities ,mentioned above, during the relevant financial period and are not exempt from the specified Regulations are required to show economic substance in the country and are also required to file an economic substance return.
The economic substance return must be filed within 12 months from the end of the relevant financial period.
How JAXA can help you?
With a team of accounting professionals, JAXA stands as certified public accountants in Dubai, and can cater to your accounting needs.