The UAE government has implemented Economic Substance Regulations (ESR) with effect from 30th April 2019. The UAE cabinet has promulgated resolution no. 31/2019 detailing the subject resolution. The UAE has issued Economic Substance Regulations as part of the nations' involvement as a member of the OECD Inclusive Framework and with regards to an evaluation of the country's tax framework by the European Union Code of Conduct Group on Business Taxation. UAE Economic Substance Regulations will apply to certain types of business activities, including banking, insurance, and shipping, undertaken in Freezone and Mainland jurisdiction.
The European Union observations regarding tax evasion, improper tax practices, and tax avoidance using illegal means have led to the necessity for such a regulation. The designated committee in the European Union has examined the tax framework in the country and directed adequate enhancements. UAE, being a member of the Organization for Economic Co-operation and Development (OECD), has accepted the suggestions and prepared ESR accordingly.
The all-encompassing regulation will aid the authority in stringent monitoring of taxes. Thereby, ensuring that tax evasions and tax avoidance are reduced to a remarkable extent. The federal government in the country has introduced amendments in 2020, to improve the efficacy of the regulation. UAE cabinet resolution no. 57/2020 in respect of Economic Substance Regulations is in force presently. The amended version envisages better monitoring of activities by the relevant entities by the authorities. Besides ease of filing of taxes by those companies.
The UAE Economic Substance Regulations norms are intended to prevent tax-related fraud, promote fair competition, and ensure optimum support in the economy. The directives under ESR stipulate the activities that must be conducted by a licensee in the state. Non-fulfilment of the said orders will result in hefty fines, legal procedures, or revoking of business license. It is in the best interest of the company to comply with the regulations meticulously. The Regulations require the free zone and onshore companies and some other business forms in UAE that conduct any of the defined “Relevant Activities” to maintain and demonstrate a satisfactory “economic presence” in the UAE with respect to the activities they engage (“Economic Substance Test”).
The business fields that are under the UAE Economic Substance Regulations regime are as follows:
The activities to be undertaken by the licensee in the state are detailed separately in the subsequent part.
Banking – The activities in the banking sector will include the following.
Shipping – Shipping companies both in domestic and international operations have to abide by ESR-2020. The acts of organizations in shipping are:
Insurance – The activities in the field of insurance are somewhat similar to that of the banking sector.
Lease and Finance – The majority of business sectors included in UAE Economic Substance Regulations deal with money transactions. The activities of firms in the field of lease and finance are.
Investment and Fund Management – Decision-making is of paramount importance in the field of investment and fund management. The performance of the organization will wholly depend upon the decision-making skills of the top management.
The activities to be conducted by the licensee, in respect of other business arenas included in ESR are similar. Those will depend on the type of business and the tasks to be accomplished to keep the business moving ahead.
A licensee must abide by the regulations laid down in the latest, amended, version of ESR. Failure in pursuing with the stipulated norms can invite penalties or cancellation of license and will affect the credibility of the firm. Therefore, the organizations must make sure that the requirements as in UAE Economic Substance Regulations are to focus devotedly to continue business services in UAE without facing any unpleasant legal actions.
The organizations directly under the government and governmental bodies are immune to subject regulations. Rest all business entities must furnish the economic activities in the predefined time intervals, i.e. each quarter, end of fiscal, or as prescribed by the authority. The penalty for non-compliance with ESR will vary from AED 10,000 to 50,000.
The Economic Substance Test applies to the business entities operating the field specified in the preceding paragraphs, wherein they are:
In a nutshell, the economic substance test is aimed at examining the activities undertaken by the entity in the relevant fiscal period. During the said test, the business performance during the period, the income earned through business activities, the board meeting conducted, including the minutes and signatures of authorized director board members, the qualifications of the full-time employees, expenditure towards maintaining the premises, and qualification and authorization of third party organization in case of outsourced firms.
CDA Accounting and Bookkeeping Services LLC have a team of skilled professionals with extensive experience in the business arena of the UAE. We will custom-tailor the services according to your needs. Keeping the client-interest as our prime objective, we strive to deliver the best. Therefore, you are at the right place if you are looking for credible firms to support you for the preparation of ESR in UAE or any support in the business accounting and auditing services. We have handpicked professionals with the right aptitude and attitude to serve our clients with cent percent dedication and honesty.
We will prepare and organize the accounting aspects, monitoring of income and expenditure, and carry out necessary calculations. Thereby, aiding you in complying with the UAE Economic Substance Regulations. We endeavour to obtain an optimum benefit for our clients by keenly examining the financial documents and avoiding any type of mathematical or calculation errors. The perfect maintenance of ESR norms will enhance your credibility and improve your business prospects.
The ESR norms have been necessitated by the observations of the European Union on non-tax cooperating countries. The implementation of ESR is envisaged to ensure proper compliance to tax rules and prevent fraud in the form of tax evasion and tax avoidance. This will also be expected to preclude artificially inflated turnover and other gimmicks towards gaining profit.
The primary purpose of ESR is to control or reduce tax evasions and monitor companies that attract profit through unethical activities. Additionally, it ensures that the tax regulations formulated in the UAE meet global standards.
Complying with the regulations implemented vide ESR is essential to continue business activities in the UAE. The licensee must meet the stipulations in the Economic Substance Test in the UAE. Non-compliance can result in penalties from AED 10k to 50k.
The licensees operating in Freezone and Onshore have to file the return to the authorities regarding the Relevant Activity during the current fiscal. As per the regulations ibid the companies have to demonstrate the economic substance to the authority and file a return. The filing of economic substance should not be delayed more than twelve months from the respective fiscal. Else, the companies are liable to pay a penalty.
Yes, the company undergoing liquidation also should file an ESR This is excluding those companies, which are already dissolved, liquidated, or struck-off before the end date of submission of ESR.
Non-filing and incomplete/ incorrect filing will lead to a fine of AED 10K to 50K. The fine for the failure in the subsequent year will be AED 50K to 3 Lakh.
Yes, the offshore companies in the relevant business activities need to file an ESR. They are not excluded from complying with the regulations according to the subject rule.
Fill in the form below, and we'll get back to you within 24 hours.
