HOW TO DEMONSTRATE THE SUBSTANCE DURING ESR AUDIT?

January 4, 2023Dated:  | |

According to the Economic Substance Regulation of the United Arab Emirates, a License holder must file an ESR Notification and an Annual Report with the Regulatory Authority within the given time frame. Each financial year, a license holder must determine whether they engaged in a relevant activity and/or generated income from it. A License holder will be required to file a Notification only if no income is generated from such Relevant Activity. It is not necessary to submit the annual report, and as a result, it is not necessary to show economic substance for the relevance of the accounting year. The Annual Report must only be submitted if a Licensee engages in Relevant Activity and generates Relevant Income from such Relevant Activity.

Within a year after the conclusion of the reportable financial year, an annual report must be submitted to the Regulatory Authority. A licensee must show compliance with the rule in their annual report, and if they haven’t, they may need to provide an explanation of why they didn’t. Certain non-financial information must also be disclosed in addition to the financial data.

Furthermore, all private businesses in the UAE now have to comply with various reporting obligations that were introduced by the relatively recent rules. Despite its relative immaturity, the Ministry of Finance has already begun fining businesses severely for failing to comply with the rules.

The Economic Substance Test outlined in Article 6 of the ESR will be used by the Ministry of Finance for imposing these fines. A business must essentially show that:

  1. They must conduct a relevant activity and generate income from it;
  2. The relevant activity is directed and managed in the UAE; and
  3. There is an adequate substance (employees, assets) within the UAE.

How to satisfy the directed and managed test?

  1. Latest Board Resolution
  2. Articles of Association (AOA)
  3. Memorandum of Association (MOA)
  4. Minutes of the Meeting signed by all the directors
  5. MOM and all other records should be maintained in the UAE

How to satisfy the adequate test?

  1. List of all physical assets
  2. List of all employees including on a contract basis
  3. Has sufficient operational costs correspond to the scale of company activity?

Deadline for submitting the annual ESR Report

To avoid fines, all companies whose fiscal year ended on December 31 of the year, and ESR notification submission for the financial year ending June 30 of the year, is to be filed by December 31 of the year.

Our team of professionals at Flying Color is committed to helping customers with Economic Substance Regulation compliance, assessment, and reporting.

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