Economic Substance Regulations (ESRs) have been introduced in countries around the world to enforce compliance with major regulatory agencies located in Europe and the United States. These rules are aimed at jurisdictions that offer minimum tax liabilities to businesses and require certain entities doing certain types of business to demonstrate that they have a reasonable business case in that jurisdiction.
The UAE’s business landscape has undergone major changes with the introduction of regulations such as the Anti-Money Laundering (AML) and Value Added Tax (VAT) regulations. Compliance pressures on UAE companies have now intensified with the introduction of the Economic Substance Regulations (ESRs). The UAE introduced ESR in an attempt to meet the global standards set by the OECD to prevent illegal tax evasion practices. Under the new rule, mainland companies, free zone and offshore companies in the UAE must demonstrate economic value in the related activities they conduct in the UAE.
How to file an Economic Substance Regulation (ESR) Notice in the UAE
ESR regulations require offshore companies, fee zone and the mainland to independently assess their performance and submit an annual economic content notice to the appropriate regulatory authority. When filing an economic substance notification in the UAE, companies must demonstrate the following:
- Do they carry out relevant activities in the UAE?
- Are the company’s profits taxable outside the UAE?
- Financial year-end date
An operating company must submit an annual Economic Substance Report to the regulatory body to confirm that the company meets the economic content requirements.
How to define the reporting period in the economic substance notification?
Companies need to define a reporting period when submitting a notification of the UAE’s Economic substance regulations. The reporting period in accordance with the rules is calculated as the financial period beginning after January 1, 2020. Companies must indicate the “start” and “end” dates of the respective financial period.
The reporting period of a company whose fiscal year corresponds to the calendar year will be:
Start date: January 1, 2020
End date: December 31, 2020
If the company was incorporated on July 1, 2020, with a fiscal year-end on March 31st, then it would have the following reporting period:
Start date: July 1, 2020
End date: March 31, 2021
What are the penalties for non-compliance companies in UAE?
Failure to comply with the ESR notification or providing false and incomplete information may result in your company is subject to an administrative fine of AED 10,000 to AED 50,000 during the first financial year. In addition, for the next financial year of non-compliance, your company may be subject to an administrative fine ranging from AED 50,000 to AED 300,000. It’s worth mentioning that the licensing authorities may even revoke, suspend, or refuse to renew your commercial license of the company if you haven’t paid a fine.
If you have a company in the UAE and are unable to analyze whether your company is doing business in terms of economic substance, you should look for expert advice. Understanding and implementation of the new legislation are vital in making good decisions for your business. Dynamic logics can help you assess whether the ESR are relevant to your business, provide a preliminary assessment of your company’s current compliance obligations, assist with the preparation and filing of an Economic Substances Notice in accordance with the required standards, and help in rebuilding your business operations to meet the test for economic content.