Economic Substance Regulations (ESR) compliance plays an instrumental role in aligning the UAE’s entities with global standards of accounting and bookkeeping. Introduced in January 2019, it is directly concerned with international tax regulations. Additionally, it is aligned with the UAE’s commitment to comply with Organization for Economic Co-operation and Development (OECD) and the European Union (EU)’s requirements.Â
Given the need for a robust regulatory framework, it is effectively imposed on the requirement of the UAE’s entities including offshore companies, and local and MNCs. It is also imposed on the companies that carry out and earn income from any related business activities to maintain economic substance in the UAE. Furthermore, it prevents harmful tax practices and ensures that businesses are generating profits from real economic activity in the country. In addition, it is followed by annual filing requirements or organizations risk penalties for non-compliance.Â
Let’s explore the key requirements under its notification and reporting compliances.Â
Relevant business activities for Economic Substance Compliance
The UAE is recognised for its economic diversity and has become the most sought-after business destination for global entrepreneurs. Considering the need for a stringent regulatory framework, it requires entities engaged in one or more entities to be highly compliant.Â
- Banking
- Shipping
- Insurance
- Holding company
- Investment and fund management
- Intellectual property,
- Lease finance
- Distribution and service center,
- Headquarters
While ES assessment is required for individual UAE entities, there is no minimum income threshold applicable on them.Â
Key obligations in ESR compliance Notification
The UAE entities operating in one or more relevant activities are required to file a notification within six months after the ending of the financial year. They can file the notification on the online ESR portal of the Ministry of Finance’s (MoF) in which entities can disclose the relevant activities conducted and any income that was earned including the incomes that was subject to taxation outside of the UAE.Â
Economic Substance Assessment Report
The UAE entities earning income from any relevant activity(ies) are required to submit an economic substance report. The report should also show that the entity is meeting the adequate ES requirements in the UAE, including the following in the notification filing:
- Core Income Generating Activity (CIGA) test: This test assesses the activities that a business carries out in the UAE
- Directed and Managed test: This test assesses that the business is directed or managed from the UAE
- Adequacy test that requires adequate resources such as employees, expenses and assets in the UAE
Report filing
As part of the regulatory process, entities filing notification are also required to disclose various business details, including:Â
- Conducting or non-conducting Economic Substance Tests
- Important details of outsourced service provider, if applicable
- Important details of specific CIGAs conducted
- Details of the operating expenditure and number of full-time employees employed for each relevant activity
- Details of the ultimate beneficial owner, followed by others.
Benefits for introducing Economic Substance Regulations compliance
Preventing harmful tax practices:
Since the compliance ensures the entity has generated profits from the relevant entity, it eliminates harmful tax practices. In addition, business entities also demonstrate that they meet adequate economic substance requirements, without engaging in any unreal economic activities or business practices.Â
Avoiding Heavy Penalties:
Any entity that does not comply with ESR can face significant penalties for operating without meeting UAE’s regulations. Penalties may include financial fines, potential suspension or revocation of business licenses. This can disrupt operations and cause damage to the business.Â
Aligning with International Standards:
The compliance has become integral part of the UAE’s business environment. It ensures that the country’s laws are aligned with international accounting and bookkeeping standards. A sa result, it can help the country in refraining from being labeled as a non-cooperative tax jurisdiction, while contributing to attracting more foreign investments.Â
Conclusion
ESR compliance is imperative for companies established in the UAE to safeguard their operations. Its stringent criteria helps in protecting their company’s reputation while ensuring they remain relevant in the sight of the UAE authorities and international governing bodies.
A&A Associate, a leading business advisory firm in the UAE assist businesses with Economic Substance Regulations compliances. Our expert team of professionals takes the charge of all your activities that can affect your business’s ESR compliance including accounting and bookkeeping.
Looking to dive deeper into the conversation, connect with us today
Email: tax@aaconsultancy.aeÂ
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