Economic Substance Regulations(ESR) UAE

Keeping up with government updates and changes in taxation laws is an integral part of running any business. The ESR UAE guidelines have helped the country improve its credibility with the EU, removing its name from the tax Blacklist. Hence, the Economic Substance Regulations are a set of rules that will help the UAE build a more sustainable and efficient tax network. Read on to know more about the Economic Substance Dubai guidelines, and how KGRN can help you with compliance. 

What is Economic Substance Regulations UAE?

ESR in Dubai is a step that the UAE took as part of its commitment towards the OECD Inclusive Framework. The Economic Substance Regulation UAE came into force via Resolution No. 31 in April 2019. Further amendments were made to the Economic Substance Regulations in August 2020. AS a whole, ESR in Dubai requires both Onshore and Free Zone companies in the UAE which engage in Relevant Activities, to maintain and showcase an adequate economic presence within the UAE. 

What is Economic Substance Test?

 

The UAE has introduced a particular and specific legal substance requirement for all entities engaging in business within their jurisdictions. This legal requirement takes the form of an Economic Substance Test, which is a process that helps entities demonstrate their economic presence within the country. In essence, the Economic Substance Test helps in showcasing that the company reinvests the profits it makes in the UAE into the national economy and engages in economic activities that create a substantial economic impact in the UAE. Each Free Zone or Regulatory Authority may have slight differences in their Economic Substance Tests. Still, they are broadly similar to each other, as they help establish a company’s economic presence in the UAE. The Economic Substance Test essentially demonstrates the following:

1. Relevant Core Income Generating Activities the company conducts in the UAE
2. Entities and the Relevant Activity they conduct, direct or manage in the UAE
3. An entity has the required number of employees, premises and spends the right amount in the UAE.

What is ESR filing?

The Economic Substance Dubai mandates that all eligible companies must follow the guidelines from January 2019 and submit two returns to the concerned Regulatory Authorities. All eligible firms must submit a Notification Form, followed by an Economic Substance Report on an annual basis. The company must file its ESR report within twelve months before the end of the financial year. Hence, companies must complete their ESR filing for the year 2019, by December 31st, 2020. However, companies which have not earned any income from a Relevant Activity for a particular period may not take an Economic Substance Test or file a report. But, all eligible entities will have to file a Notification form anyway. 

What Are the Penalties for Non-Compliance of Economic Substance Regulations?

Failure to comply with the Economic Substance Regulations UAE will result in the following penalties;   Failure to file Notification – AED 20,000  Does not submit a Report or required documentation – AED 50,000  Does not meet the Economic Substance Test – AED 50, 000  Provides inaccurate information – AED 50,000 Failure two years in a row – AED 400, 000  

Subsequent failure will lead to the following;

Administrative action imposed by the National Assessing Authority  Suspension, non-renewal or withdrawal of the company’s commercial license.

How can I apply for ESR in UAE?

1. First and foremost, executives must go through the official website of the Ministry of Finance to find the relevant Economic Substance Regulations UAE Legislation. This will give them a good idea regarding whether their business requires them to register with the ESR or not. 
2. Next, all eligible firms must conduct a check or audit of their activities to file the required ESR Notifications Form on the MOF Portal.
3. In case your business falls under the Exempted Licensee category, you will have to file a Notification, but not a report. It is best to consult a lawyer or expert to gain an understanding of how to move ahead effectively. 
4. The MOF Portal will go live in December 2020 and contain all the required details regarding how to file the reports. The website also contains templates of both the Notification Form and Report. 
5. The filing deadline for Notifications and Reports for the period between January and December 2019, will be December 31st, 2020. 

Who Needs to Submit Economic Substance Notification?

All entities in the UAE that engage in Relevant Activities must fulfil all the ESR compliance requirements. The ESR guidelines apply to all UAE jurisdictions, including Free Zones like the DIFC, wherein the Registrar of Companies (DIFC) serves as the Regulatory Authority. Relevant Activities include any undertaking that engages in the following;

1. Banking 
2. Insurance 
3. Investment Fund management 
4. Lease – Finance 
5. Headquarters Business​​
6. Shipping 
7. Holding Company Business 
8. Intellectual property Business 
9. Distribution and Service Centre 

As per the Amended ESR, all entities that engage in a Relevant Activity, even if they fall under the Exempt category must file a Notification Form. The company must file this form within six months of the end of the Reportable Period. Hence, the first deadline for Notification filing will be December 31st, 2020. Only dissolved and liquidated entities which attained dissolution prior to the submission deadline are exempt from filing a Notification.

What Are the Economic Substance Compliance Requirements Under the Regulations?

The two broad filing requirements that all eligible companies must abide are as follows;

• Notification filing
• Ensure you have sufficient substance in the UAE and then file an annual substance return

Need for ESR Form UAE

The Economic Substance Regulations help countries which do not impose any corporate tax to comply with international guidelines on taxation. Not only does it help prevent tax evasion and avoidance, but it also strengthens a nation’s tax infrastructure. The Regulations essentially make it mandatory for companies to demonstrate that they engage in the required economic activities within the UAE. In the UAE, both Onshore and Free Zone companies have to comply with such laws. 

The UAE Economic Substance Regulations came into force in April 2019, and further guidelines regarding the same came out in September of the same year. Amendments were made to the predetermined legislation after consultation with the EU and OECD in August 2020. As you can see, keeping up with new amendments and changes might not be very easy. However, rest assured because KGRN is here for you. We offer one of the best ESR services in UAE and can create tailor-made solutions as per your needs. So, partner with us and never worry about ESR compliance again!  

How can KGRN help with the new Economic Substance Regulations UAE?

In case you have not considered your Economic Substance Regulations requirements yet, do not worry because we can help you out. KGRN provides one of the best ESR services in the UAE, and can help companies with the following;

1. Identify whether you are eligible 
2. Help you satisfy the Economic Substance test
3. Assist with filing the Notification and Report