ESR Deadlines Are Here… Have You Met Your ESR Obligations Yet in the UAE ??
As a result of the UAE’s recent introduction of economic substance regulations, all UAE enterprises that may be affected should be prepared to take action and assure compliance.
What are Economic Substance regulations?
In 2019, the UAE released the following legislation, which applies to all onshore and free zone jurisdictions and introduces economic substance regulations:
- UAE Cabinet Resolution No. 31/2019, as amended, concerning economic substance regulations in the UAE;
- guidance released by the Ministry of Finance pursuant to Ministerial Decision No. 215/2019; and
- Cabinet Resolution No. 58/2019, which designates the appropriate UAE authorities to regulate compliance under these regulations.
The “Economic Substance Regulations” were enacted in reaction to the UAE’s inclusion on the European Union’s list of non-cooperative jurisdictions for tax purposes, and their goal is to improve tax transparency and fair tax competitiveness in the UAE.
Who is subject to the Economic Substance Regulations?
The Economic Substance Regulations apply to natural or juridical (legal) persons, including all UAE onshore and free zone companies, branches, foundations, non-profit organisations and partnerships (referred to as “Licensees“) that carry out one or more of the following “Relevant Activities” in the UAE:
- Banking businesses
- Insurance businesses
- Investment fund management businesses
- Lease-finance businesses
- Shipping businesses
- Headquarters businesses
- Holding company businesses
- Intellectual property businesses
- Distribution and service center businesses
What is required under the Economic Substance Regulations?
Every Licensee who engages in one or more of the Relevant Activities is required by the Economic Substance Regulations to notify the appropriate regulatory body.
Furthermore, any Licensee who performs one or more of the Relevant Activities in the UAE and derives income from the Relevant Activity must pass an “economic substance test” and submit an economic substance report to the appropriate regulatory authority within 12 months of the end of the relevant financial period. Companies with at least 51 percent direct or indirect ownership by the Federal or an Emirate government, or a UAE-based government organization or authority, are excluded.
Depending on the type of Relevant Activity and the area in which it is performed, the applicable regulatory authority changes. The format of the reports to be filed, as well as the means for submitting them, will be determined by each regulatory authority.
ATTENTION: Companies in the UAE must review their potential obligations under the UAE’s Economic Substance Regulations (ESR). Relevant ESR filings must be submitted through the Ministry of Finance Portal by 31 December 2021. Failure to comply may result in substantial penalties.
NOTE: Filing deadlines vary based on the financial year of the company as registered or notified with the authorities.
- ESR Notification Requirement: Licensees and Exempted Licensees must file an ESR Notification within 6 months of relevant financial year end
- ESR Reporting Requirement: Licensees must file an ESR Report including all relevant information substantiating that the Licensee has satisfied the Economic Substance Test within 12 months of a relevant financial year end.
ESR filings should be submitted directly to the Ministry of Finance (MOF) at the ESR
Failure or delay in filing Notifications or Reports, or knowingly filing inaccurate information, for a relevant financial year can result in administrative fines of AED 20,000 – AED 50,000 for each breach.
Repetition of ESR filing violations in a following financial year may result in a further administrative fine of AED 400,000.
The Federal Tax Authority (FTA), working under the umbrella of the MOF, is actively enforcing non-compliance.