Effect of Implementation of ESR for the Businesses in the UAE

June 9, 2021 | |

On the 30th of April 2019, the UAE introduced Economic Substance Regulations or ESR by the Cabinet Decision No. 31 of 2019 intending to curb unlawful tax practices. The guidance on the implementation of the ESR on the businesses in the UAE was issued on 11th September 2019 by Ministerial Decision No. 215 of 2019 and was recently amended on the 10th August 2020 by Cabinet Minister Resolution No. 57 of 2020 with the guidance from Ministerial decision No.100 of 2020.

The thus implemented regulations apply to all companies in the UAE which carry out the ‘Relevant Activities’ (as mentioned in the regulation) related to Insurance, Banking, Investment Fund Management, Holding Business, Shipping Business, Distribution and Service Centre Business, Intellectual Property Business, and Lease- Finance Business. Accordingly, every company is required to analyze its respective activities and submit ESR notification to the authority to validate its sufficient economic presence in the UAE (the Economic Substance Test). However, the recent amendment in the ESR regulations states that when a UAE company has branches in UAE with a single parent company, ESR notification need not be filed separately for all branches but a single file mentioning the activities of the company is enough.

According to the new ESR regulations, if a business qualifies as a Licensee, the notification must be filed with the UAE Ministry of Finance through an online portal, within six months from the end of the financial year. The businesses that fail to observe the regulations would have to face penalties and other consequences including suspension, revocation, or non-renewal of the trade license or trade permit. Licensees who thus must meet the economic substance test should submit their report to the Ministry of Finance within 12 months after the end of the financial year for the Licensee.

The impact thus caused by the implementation of ESR for the business in the UAE are:

  • The most important part of ESR implementation for the businesses in the UAE is that the companies are required to provide accurate annual or bi-annual reports to the authorities depending on the activities performed.
  • The implementation of ESR in businesses, therefore, demands the companies to employ legal and correct methods whilst doing business and also require them to submit exact financial statements.
  • As part of fulfilling the Economic Substance Test, the licensee must:
  1. Conduct CIGA (Core Income- Generating Activity) in the UAE with regards to the level of income generated.
  2. Must be directed and managed in the UAE
  3. Have an adequate number of employees physically present in the UAE, and an adequate level of expenditure on outsourcing to third-party service providers in the UAE.
  4. Have adequate physical assets in the UAE or an adequate level of expenditure on outsourcing to third-party service providers in the UAE for license activation.
  5. The report must also contain the location of the relevant activity of the business and a declaration by the Licensee if the business satisfies the economic substance test.

Repeated failure of the licensee to comply with the regulations of ESR as implemented for the businesses in the UAE or continuous misinformation in relevant data to the authority could result in the non-renewal of license or even the liquidation of the company.

According to the new ESR UAE resolution for businesses in the UAE,

  • Failing to submit the notification and any relevant documentation will result in a penalty of AED 20,000.
  • Failing to submit the ESR report or meet the Economic Substance Test for each year will result in a penalty of AED 50,000.
  • Committing the same violation in the Financial Year following the year in which the first violation was committed will result in a penalty of up to AED 50,000 and repetitive failures AED 400,000.
  • Providing inaccurate information to the regulatory authority will result in a penalty of up to AED 50,000.

 

The implementation of ESR thus facilitates healthy competition within the sectors which could ultimately boost the profit margins.

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