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UAE Economic Substance Regulations

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UAE-Economic-Substance-Regulations

The Economic Substance Regulation has been introduced in the UAE in April 2019 with the aim to curb harmful tax practices while at the same time complying with the global standards. It is a major step toward preventing businesses from unethically shifting their profits to jurisdictions that impose minimum or no income tax with the intention of taking advantage of their liberal tax regime. 

In order to restrict this practice of profit sharing and to promote transparency, ESR laws impose an obligation on the businesses operating in UAE to have an adequate presence in the country. The regulation aims to demonstrate that these businesses have substance and legitimate operations in the UAE. 

It applies to all UAE onshore as well as free zone legal entities that carry out one or more of the 9 ESR “Relevant Activities” referred to as “licensees”. These relevant activities include Banking, Distribution and service centre, Fund management, Headquarters, Holding company, Insurance, Intellectual property, Finance and leasing and Shipping.

ESR Filing Requirements

Entities that fall within the scope of the regulations have to file ESR Notification and submit ESR Reporting. The annual filing obligations for such entities are as follows:

Relevant Activities Income Earned Notification Reporting
No No Not required Not required
Yes No Must be filed within 6 months from the end of the financial year declaring that the entity undertakes Relevant Activity. Not required
Yes Yes Must be filed within 6 months from the end of the financial year declaring that the entity undertakes Relevant Activity. Must be filed within 12 months from the end of the financial year declaring certain business information demonstrating economic substance. The information includes income figures, expenses, assets, number of employees, etc.

Reporting Deadlines

Below are the reporting deadlines for a selection of financial year ends:

Fiscal Year End Notification Filing Deadline Report Filing Deadline
30 Jun 2021 31 Dec 2021 30 Jun 2022
30 Sept 2021 31 Mar 2022 30 Sept 2022
31 Dec 2021 30 Jun 2022 31 Dec 2022
31 Mar 2022 30 Sept 2022 31 Mar 2023

Penalty for Non-Compliance

In case of non-compliance with ESR regulations by the entities, Federal Tax Authority (FTA) can impose wide-ranging and significant penalties which are as follows:

Offense Penalty in 1st year Penalty in the subsequent year
Failure to submit a Notification AED 20,000 AED 20,000
Failure to submit an Economic Substance report AED 20,000 AED 20,000
Failure to provide accurate or complete information AED 50,000 AED 50,000
Failure to demonstrate sufficient economic substance in the UAE AED 50,000 AED 400,000

The penalty can be imposed anytime within six years from the date of such violation. In case of persistent non-compliance, the entity’s license can be suspended, revoked or not renewed.

Why Accurate Assessment of Activities is Important?

Accurate assessment of the relevant activities is very important because failure to do so can result in huge penalties. Therefore, it is crucial for entities to undertake assessments on a yearly basis.

How Can IMC Group Help?

IMC Group can help you in regards to complying with ESR requirements and assist in the filing of the ESR notifications and ESR reports in an efficient and professional manner. We can help you in the following ways:

  • ESR Applicability Assessment

We conduct a detailed study of your business activities to assess the applicability of Economic substance regulations.

  • ESR Notification Filing

We provide support and guidance in preparing your ESR Notification and filing it with the Ministry of Finance as a part of ESR compliance.

  • ESR Report Filing

We provide support and guidance in preparing your ESR Report and submitting it as per the requirement of the Ministry of Finance.

  • Economic Substance Regulations Test and Compliance

We can assist in undertaking Economic Substance Regulations impact assessment and gap analysis audit to identify the non-compliant aspects. We guide you and recommend corrective or preventive actions to fulfill the requirements of ESR.

  • Submitting Appeal

We can assist you in submitting an appeal against the penalties that are already levied concerning ESR compliance.

  • Accounting and Bookkeeping

Our team can help you maintain proper and up-to-date accounting records as per IFRS accounting principles ensuring relevant activities and associated income are easily identifiable and presentable to authorities as and when required.

Contact IMC Group and easily navigate through the Economic Substance Regulation and guidelines based on your jurisdiction. Book a consultation with our experts now!

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