WHAT is ESR?
UAE has introduced the Economic Substance Regulations (“the ESR”) by way of Cabinet Decision No. 31/2019 in April 2019 concerning the economic substance regulations. According to the Regulations, a company needs to demonstrate real economic purpose and substance in the UAE, failing which is liable to be fined and penalized.
WHY ESR?
To meet with international requirements and in order to prevent tax planning strategies from being used to exploit loopholes in tax rules to avoid paying tax and to ensure a more transparent tax environment.
WHO needs to comply with ESR?
All onshore and free zone companies – including companies licensed and registered in the financial free zones (DIFC & ADGM– if they carry out a “Relevant Activity” in the UAE. The following are considered as “Relevant Activities”:
- Banking business
- Insurance business
- Investment Fund Management business
- Shipping business
- Lease- Finance business
- Distribution & Service Centre business
- Headquarters business
- Intellectual property business
- Holding Company business
HOW to comply with ESR?
All companies which carry out a Relevant Activity are required to demonstrate “economic substance” in the UAE by conducting the “Economic Substance Test”. A Company can meet the Economic Substance Test if:
- the entity is directed and managed in the UAE in relation to that activity.
- the entity performs Core Income-Generating Activity (CIGA) in relation to the Relevant Activity in the State.
- the entity employs an adequate number of qualified full-time employees or incurs an adequate level of operating expenditure and adequate physical assets in the State.
- if the CIGA is conducted by another entity for the subject company, then check if the subject company has full control and is able to monitor the activities of the other entity
WHEN to file the ESR notification?
Companies must submit the notification in the prescribed format to its competent regulatory authority (ies) before the deadline of 30th June 2020.
If your company is in a free zone, please refer to your free zone authority’s deadline and format (or free zone web portal link) to complete and submit the ESR notification. If your company is under the Department of Economic Development please go through the form on the link provided by the Ministry of Economy and file your ESR notification
Once the notification has been filed, it is important for companies to file their ESR return on or before the end of their financial year
These filing requirements are here to stay and are annual compliance requirements that have to be followed by all companies licensed and registered in the UAE.
Penalty
Penalties and fines ranging from AED 10,000 to AED 50,000 and in some cases up to AED 300,000 have been prescribed in the regulations for non-compliance.
In accordance with the guidelines issued by the Ministry of Finance of UAE, all businesses are required to check if they fall within the scope prescribed and accordingly implement strategies for compliance and prepare for the notification and reporting requirements
Being one of the top law firms in Dubai, James Berry & Associates have qualified and experienced lawyers in Dubai who can assist you with your ESR requirements.
To know more, contact: Deepa or James.
Managing Partner
Senior Legal Consultant, Corporate & Commercial