What are Economic Substance Regulations, when were they introduced and why did the UAE Government introduce them?
The resolution was introduced by the Cabinet of Ministers Resolution No.31 of 2019 and it came into view on 30 April 2019. The guidance was issued by (Ministerial Decision No. 215 of 2019) on 11 September 2019. The amendments were made in 2020 to check the regulation of the UAE economy in countries where there is no tax or low tax. It was introduced in areas such as being a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”). To overcome the losses that much of the economy has faced. The main purpose of Economic Substance Regulations (“ESR”) is not for tax levitation, but to make such a system of inducement that results in good competition for the customers in terms of prices, quality, and important investment that looks for the profit of its customers. So, the companies report their actual profit.
What Are the Relevant Business Activities as per Economic Substance Regulations in the UAE?
The UAE Economic Substance Regulations apply to companies that are both onshore (including Free Zones) and offshore. These companies incorporate legal entities linked to relevant activities. The relevant business activities under the ESR are:
● Banking Businesses
● Insurance Businesses
● Investment Fund Management Businesses
● Lease-Finance Businesses
● Holding Company Businesses
● Intellectual Property Businesses
● Headquarters Businesses
● Shipping Businesses
● Distribution and Service Centre Businesses
How to file the economic substance regulations return in the UAE?
According to Article 8 Cabinet Resolution No. 31 by the Ministry of Finance, a licensee and/or company, conducting anyone on the above ‘Relevant Activity’, will be required to do the following:
- Filing a Notification with the UAE Ministry of Finance on its online portal.
- Submit an Economic Substance Report/Return to the UAE Ministry of Finance on its online portal.
How will it impact your business if you fail to file the economic substance regulations return in the UAE?
Submitting a Notification and its report is essential for the UAE businesses carrying out relevant activities. If the business carrying out the relevant activities doesn’t submit the ESR Notification and its report or it continuously fails to provide the relevant data or meets any standards as referenced in the law, then the permit of the entity may not be renewed and will be subject to penalties. Thus ESR has a huge impact on the nation’s overall economic system. This will similarly help the company’s management to update and maintain its records.
What are the penalties for failing to file the economic substance regulations return in the UAE?
- Failure to file a Notification – a penalty of AED 20,000.
- Failure to submit a report – a penalty of AED 50,000.
- Failure to meet the ESR test – a penalty of AED 50, 000
- Providing inaccurate information – a penalty of AED 50,00
In case of 2nd successive failure for a year
- a penalty of AED400,000 and action by the National Assessing Authority.
For Businesses carrying out the relevant activities, the deadline for ESR Notification and its report of the Financial Year 2019 is 31 December 2020.
How can we help to file the economic substance regulations return in the UAE?
If you own a company in the UAE carrying out the relevant activities and/or you are unable to determine whether your company conducts a relevant activity, then you must seek professional advice.
Understanding the new legislation and its implications is key to guaranteeing you make the right decisions for your business.
Dubaibusinessadvisors can help you in evaluating whether the Economic Substance Regulations are relevant to your business. We can provide you with preliminary assessments of your company’s current compliance obligations; help with the preparation and filing of the Economic Substance Notification to the required standards; create and submit an ESR Report; and, help with the restructuring of your business operations to satisfy the economic substance test.
Let’s chat and find out whether your business falls under the scope of Economic Substance Regulations.