In accordance to the Cabinet Resolution No. 57 of 2020, the Federal Tax Authority is appointed as the National Assessing Authority.
UAE has initiated Economic Substance Regulations (ESR) on local companies based in the country, including businesses formed in the free zones and branches of foreign companies and those engaged in any of the defined ‘relevant activities’.
It is mandatory, that these companies must be evaluated by a proper assessment to the authorities. In the case of qualifying the assessment, the company must present the economic substance notifications, including preliminary information about the activities.
This notification is a prerequisite for submitting an economic substance report by the company.
What are the “relevant activities” as per ESR?
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease - Finance Business
- Headquarter Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business (IP)
- Distribution and Service Centre Business
When should the ESR be submitted?
Companies and establishments that are dealing with any of the above ‘relevant activities’ in UAE are required to submit economic substance notifications and reports to the regulatory authority on an annual basis.
- Failure to adhere to the rules will result in penalties.
- The ESR notification should be done within a period of 6 months from the end of the fiscal year.
- The ESR report should be submitted within a period of 12 months from the end of the fiscal year.
Who are exempted from ESR?
Certain entities conducting Relevant Activities are exempt from the requirement to maintain adequate economic substance in the UAE, subject to meeting certain conditions.
Listed below are the exemption available:
- Investment funds
- Entities owned by UAE nationals that are not part of a multinational group and conduct business only in the UAE
- Entities that are tax residents outside of the UAE
- Branches of foreign entities
An entity making an exemption claim is only required to file a notification along with the relevant documents for substantiating the claim. Where the exemption claim is denied, such an entity will be required to meet the ESR Tests and file a report accordingly.
Penalties
| Failure to file notification | AED 20,000 |
| Failure to report | AED 50,000 Will be deemed not to have met ESR test |
| Failure to provide complete or correct information | AED 50,000 Will be deemed not to have met ESR test |
| Failure to meet ESR test | 1st year AED 50,000 Information exchange with foreign competent authorities 2nd consecutive year AED 400,000 Information exchange with foreign competent authoritiesSuspension, cancellation or non-renewal of trade license |
| Failure to comply | Financial penalties (AED 20,000 to AED 400,000) Suspension, withdrawal, non-renewal of trade license |
Why Flying Colour?
ESR procedures are comparatively more tricky than the other compliances, hence it needs due diligence in understanding the business operations and the activities involved. It is highly recommended to be done by qualified and trained professionals, in order to avoid ending up making errors during notification filing or reporting because of the lack of knowledge, which results in hefty penalties.
In order to save your business from making terrible mistakes that can attract huge penalties, choose Flying Colour. Our team of experts will ensure on perfection, compliance and timelines.
To learn more about Glimpse of Economic Substance Regulation (ESR) in UAE, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.