Economic Substance Regulations in UAE
In 2019, The UAE introduced ESR or Economic Substance Regulations. ESR is a series of Directives and resolutions whose purpose is to restrain harmful tax practices in the UAE and compliance with OECD international standards and the European Union Code of Conduct Group on Business Taxation guidelines.
Economic Substance Regulations imply a requirement for certain companies & they must maintain a fair economic presence in the UAE relative to the activities they undertake. This article has the 10 key factors to consider in the Economic substance regulations for the businesses under ESR compliance.
Here are 10 key factors to consider for ESR compliances for the companies that come under this category
1) What is ESR compliance?
ESR or Economic Substance Regulations is an Economic Substance test that every defined company or an entity (Licensee) that maintains suitable activities and derives an income from their prescribed role in the UAE is required to complete.
2) An exempted licensee as per ESR compliance:
There are certain exempted entities from ESR compliances, and they are:
- A tax resident licensee in a jurisdiction other than the UAE
- An investment fund
- An entity owned by one or more UAE residents. Given that it only carries out business in the UAE and is not a part of an MNC Group and
- A foreign entity branch whose applicable income is subject to tax outside the UAE
- Any other Licensee as determined under a decision of the Ministry of Finance
3) Impact of ESR compliances on the Businesses:
The rule of ESR compliance requires the onshore and offshore companies in UAE and a few other business forms that carry on relevant activities to retain and establish an adequate economic presence in the United Arab Emirates.
4) The Rules apply to financial years that commenced on or from 1 January 2019. The companies that are within the range of the Regulations are needed to submit an annual notification form to their Regulatory Authority,
5) These entities should also complete and submit an ESR Report to the same Regulatory Authority within 12 months from the end of their financial year
6) An entity does not require to meet or file for the Economic Substance Test and Economic Substance Report as it has not earned any income from a relevant activity or if it meets the conditions for being excluded. Regardless a notification form will need to be submitted.
7) Failure to yield to the Regulations will lead to penalties, involuntary exchange of information with the Foreign Competent Authority, also other executive boycotts such as the suspension, cancellation, or non-renewal of the company’s trade license.
8) The ESR compliance is enforced to mount back illegal tax practices & wrongdoings within the businesses and stop fraud tax practices followed in international trade. An ESR compliance also ensures that the entities pay the correct taxes.
9) The goal of the new conditions includes all entities completing relevant activities apart from any commercial company that is owned directly or indirectly by the UAE Government or any subordinate government authority.
10) The implementation of ESR helps companies to reduce illegal business practices. The ESR will facilitate the entities that are better and rightfully do the business.
To know more about ESR Compliance and Support, click here
We at RVG can assist you in
- Identifying whether your activities fall within the scope of qualifying entities for Economic Substance Regulation (ESR) compliance,
- Identify the qualifying business segments for Economic Substance Regulation(ESR) compliance
- Filing Annual Notification with the regulatory authority
- Comprehensive Evaluation of the company’s current state of compliance and
- providing recommendations with regards to the Economic Substance Test and
- Secretarial services in connection with Economic Substance Regulation (ESR) record maintenance.
- Submitting Economic Substance Return to the regulatory
