On April 30, 2019, the UAE issued Economic Substance Regulations as part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation. Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies defines the Regulatory Authorities responsible with the administration and enforcement of the Regulations.
ESR, or Economic Substance Regulation, is one of the most talked-about topics in the UAE business world since it went into effect. Despite the passage of time, anomalies in the filing of first notifications and varied processes for different agencies put enterprises and firms in a bind. As a result, the firms want counsel from someone with a wealth of knowledge and who watches announcements/clarifications in the ESR sector. Firms and businesses that do not follow the ESR laws and regulations risk being fined and having their operations suspended.
Because of this significant change in the UAE’s business landscape to implement global level compliance, mainland, free zone, and offshore enterprises in the UAE must provide economic substance in designated relevant operations undertaken in the UAE. The first step of ESR compliance is to file an economic substance notification with the appropriate regulatory agency in the UAE within the specified timeframe, i.e. by the first ESR Report filing date, which is January 31, 2021.
Do you need to file ESR?
- Intellectual property business
- Banking business
- Shipping business
- Insurance business
- Holding company business
- Distribution and service centre business
- Headquarter business
- Lease-finance business
- Investment fund management is a lucrative business.
It is vital to note that for accounting purposes, several corporations or consolidated groups of companies are not permitted to file a single notification. Each company must file its own application, as consolidated ones are judged invalid. To prevent such a predicament, it is necessary to get advice from reputable expert CA businesses in Dubai, provided they have prior experience offering ESR services.
Recent developments is ESR?
A new category of exemptions was created with the implementation of Resolution 57/2020. Notification must be filed along with documentary evidence to demonstrate the position in order to get the exempt status for ESR. In addition, UAE FTA will lead the charge as an authority in place of each licensee’s regulatory authority; for:
- Licensees’ assessment of their ability to pass economic substance testing
- imposing sanctions for non-compliance
- Licensee appeals are heard and a decision is reached.
The following penalties have been enhanced as a result of the same resolution:
As a result of the new modification, enterprises in the distribution and service business will need to make further clarifications in their ESR filings this year. Notifications, reports, and documents that must be filed with the appropriate authorities will now be done through a portal that the UAE Ministry of Foreign Affairs has yet to launch.
First and foremost, the company must guarantee that the operations it performs are included in the list or subset of relevant activities. The firm can verify new rules by visiting the UAE Ministry of Finance website for confirmation or information. Only licensees and exempted licensees who engage in relevant financial activity are required to file Notification within six months of the end of that period.
After that, the company must determine whether or not they qualify for the Economic Substance Test. Firms can find the template notification and ESR report on the Ministry of Finance website before submitting for the notification.