The Economic Substance Regulations in UAE (also known as ESR for short) were enforced on the 30 of April 2019 via Cabinet of Minister Resolution No. (31) of 2019. On 10th August 2020 New ESR was introduced via Cabinet Resolution 57/2020 which repealed and revoked Cabinet Decision no. 31/2019. Also, Ministerial Decision No 100 for the year 2020 replaced Ministerial Decision 215 for the year 2019.
So, Entities will now have to comply with Cabinet resolution 57/2020 & Ministerial Decision 100 for the year 2020 giving directives for the implementation of the provisions of Cabinet Decision no. 57/2020.
Later in August 2020, the UAE Ministry of Finance issued Ministerial Decision No. 100 of 2020 that contains a Relevant Activities Guide that helps ascertain if your business conducts a relevant activity and falls within the ambit of the ESR or if it is an Exempted Licensee under the Amended ESR. This regulation is intended to resist harmful tax practices while conforming to global standards. The regulations and guidelines apply in all UAE jurisdictions, including free zones. Since this is a relatively new regulation, businesses can be confused about how to file ESR. The best option is to seek guidance from ESR return submission consultants who have experience in this. Business consultants like Avyanco regularly monitor announcements and clarifications by the government regarding ESR.
Why Economic Substance Regulations were introduced in the UAE
The Economic Substance Regulation (ESR) set forth by the Organization for Economic Cooperation & Development (OECD) were introduced to
- Comply with global Anti-Money Laundering regulations
- Curtail harmful tax practices
- Eliminate shell on-paper companies
Any business in the UAE carrying out Relevant Activities must demonstrate their Economic Substance in the UAE and submit their Economic Substance Report to the relevant regulatory authorities. Companies registered/formed in the UAE (including free zones) that carry out business in the following sectors must do ESR report submission in UAE.
- Insurance Business
- Banking Business
- Lease Finance Business
- Shipping Business
- Distribution and Services – Distribution & Service Centre Business
- Investment Fund Management Business
- Holding company
- Headquarter Business
- Intellectual Property Rights
The amendment in the ESR lays out changes in the regulation, such as the definition of a licensee, exempted licensee, and modifications to some relevant activities.
Each year, the ESR notification form must be submitted by organizations within the ESR Regulation scope to the respective Regulatory Authority. Within 12 months from the financial year ending, must complete and submit the ESR Report to the same Regulatory Authority. Those businesses that have not yet earned income from any of the Relevant Activities and those eligible for ESR exemptions do not need to comply with the Economic Substance Test or file Economic Substance Report. However, a notification form is must be submitted.
If you failure to comply with the submission of the ESR it may result it
- The imposition of ESR penalties.
- Immediate exchange of information with the foreign Competent Authority as described in Article 1 of the Regulations.
- Other administrative sanctions such as suspension, revocation, or non-renewal of the company’s trade license or permit.
Step by Step guide to ESR return submission in UAE
- Eligibility assessment – As a first step, the company needs to check whether the activities they conduct fall in either the list or subset of relevant activities. Only businesses who conduct relevant activity need to file notification within six months from the end of the applicable financial activity period.
- Test assessment – As the next step, the company has to make sure that they qualify for the Economic Substance Test. Before filing for notification, find the template notification ESR report from the Ministry of Finance website. For more expert guidance on this, you should seek advice from ESR filing companies in UAE like Avyanco.
- Filing – The last step in the ESR submission process is filing the notification with the relevant authority in the UAE. Even after filing, companies need to keep annual substance return poofs.
The penalties for failing to submit the ESR notification & report within the government’s deadline are quite steep. They are as follows
- If you do not submit ESR Notification collectively with the necessary documents within the deadline, you will be issued a penalty of AED 20,000.
- If you do not submit an Economic Substance Report within the period mentioned above, you will be issued a penalty of AED 50,000.
Exceptions to ESR regulations
Some entities are exempted from filing ESR Report. This includes
- Entities that are solely owned by UAE residents and are not part of a multi-national group and carry out their activities only in the UAE
- Licensee/s are tax resident outside the UAE
- Investment funds
- Branches of foreign companies that subject to tax outside the UAE
FAQs on Economic Substance Regulations in UAE
1. Is a company registered under free zone company ESR Regulations?
Yes, it is. If the FZE company undertakes any of the listed Relevant Activities, it is subject to ESR regulations.
2. When should the ESR Notification and Report be submitted?
Currently, the submission of the ESR Notification and Report has been extended until the end of the year. This year it must be submitted by 31 of December 2020.
3. What happens if I fail to submit my ESR Notification and Report before the deadline?
If you fail to submit your ESR notification and report before the due date, you will incur ESR penalties as follows
4. What is the objective of ESR Compliance?
Objective of ESR is to identify Substance over Form meaning that companies conducting relevant activities must have adequate presence in the jurisdiction which they are tax resident.
5. What is a reportable period in ESR?
Reportable Period is the financial period of the company conducting relevant activities to which the Economic Substance Notification relates. Applicants have to include the start date & the end date of the relevant financial period
|Failure to submit the ESR Report||AED 50,000|
|Failure to submit the ESR Notification with the essential supporting documents||AED 20,000|
|Failure to resubmit the ESR Notification (for those licensees who have already submitted the ESR Notification directly to their Regulatory Authorities)||AED 20,000|
|Financial Year End||Due-Date for ESR Notification||Due-Date for ESR Report|
|31st Dec 2019||June 2020Re-submission on MoF Portal by 31st Dec 2020||31st Dec 2020|
|31st March 2020||Sep 2020 Re-submission on MoF Portal by 31st Dec 2020||31st Mar 2021|
|30th June 2020||31st Dec 2020 on MOF Portal||30th June 2021|
|30th Sep 2020||31st March 2021 on MOF Portal||30th Sep 2021|
Why Avyanco for ESR Filing Services in UAE?
Suppose you are running a business in the UAE. In that case, you have to ensure that your ESR notification file is filed before the due date, or you will incur steep ESR penalties. Avyanco is one of the leading business set up consultants in Dubai. Our team consists of PR experts, lawyers, and tax consultants. We can help you understand up to what extent ESR applies to your business and offer expert advice on ESR Notification Filing. We can help ensure that your organization complies with all ESR requirements and avoids ESR penalties. Please reach out to us for any queries regarding ESR assessment and return filing. Our ESR return submission team and filing experts are always available to lend a helping hand or advice regarding all your questions on Economic Substance Regulations in UAE.