What is all about ESR?:
As part of the UAE’s commitment being a member of the OECD Inclusive Framework, in response to an assessment of the UAE’s tax framework by the European Union (“EU”) Code of Conduct Group on Business Taxation, the UAE introduced a Regulation on the Economic Substance (Cabinet of Ministers Resolution No.31 of 2019, the “Regulations”) on 30 April 2019.
Is it applicable to your business?
The regulations are applicable to all the companies in UAE except to a very limited section of the organisations. The regulations are applicable to companies in all the free zones doing relevant activities.
What is the effective date?
The Regulations apply to financial years commencing on or from 1 January 2019.
What are the Relevant Activities?
- Banking Business
- Insurance Business
- Investment Fund management Business
- Lease – Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual property Business (“IP”)
- Distribution and Service Centre Business
Once a UAE company has been identified as undertaking relevant activities, the ESR requires the company to satisfy the economic substance test which comprises three elements:
1). It is directed and managed in the UAE in relation to that activity
2). It conducts Core Income-Generating Activities (CIGA) in the UAE
3). It meets the adequate requirements with regard to the level of relevant activity carried on in the UAE.
What is the way forward if ESR is applicable to your business?
If you are carrying out the relevant activities and you are earning income out of it, you may have to give a notification, make the necessary changes in the way you operate the business if you are not managing it the way it is needed as per the law and submit the ESR report by testing whether we met the conditions or not.
What are the due dates for submission of the ESR notification and ESR Report?
Notification and ESR Report should be submitted with the relevant authority with 12 months from the end of the financial years beginning on after 1st January 2019. This means it should be filed on or after 1st January 2020 but before 31st December 2020 for the companies having year ended 31st December 2019.
What are the penalties for not complying with ESR?
- Failure to notify: AED 10,000 to AED 50,000
- Failure to provide accurate or complete information: Penalty of AED10,000 to AED 50,000; and
- Deemed failure to demonstrate economic substance in the UAE Failure to demonstrate sufficient economic substance in the UAE for the relevant Financial Year: First Failure: AED 10,000 to AED 50,000, Second Failure: AED 50,000 to AED 300,000.
- Trade / commercial license could be: suspended, withdrawn or not renewed.
How can Spectrum Auditing help you in complying with ESR?
- Spectrum can help you in assessing whether ESR is applicable to your business or not
- We can help you in submitting the ESR notification
- WE can help you in bringing the necessary changes in organising your business to be able to comply with the requirements of ESR
- WE can help you in submitting the ESR return
What to do now?
Let us know if you want to have a free consultation to check whether ESR is applicable to your business or not, by contacting us.