With the institution of Cabinet Resolution No. 57 of 2020, the Economic Substance Regulation (ESR) in the UAE has become a dynamic compliance obligation for businesses. Under this resolution, administrative penalties have been established to report violations related to ESR. Therefore, it is advisable for licensees to seek the services of ESR Consultants in UAE to effectively ensure compliance with the ESR regulations.
Licensees and Exempted Licensees are required to comply with ESR regulations to avoid penalties for noncompliance.
Some key violations include;
- Providing wrong information
- Failure to submit ESR notification and ESR Reports
- Non-compliance with the Economic Substance Test
The key requirement of ESR compliance
Compliance with ESR requires careful attention to the necessary elements outlined by the regulation. One key aspect is the identification and performance of extensive activities within the jurisdiction. Businesses must be engaged in activities that align with their primary income-generating activities, confirming economic substance is demonstrated within the UAE. Also, organizations need to keep adequate substance.
These should be apt with the nature of their operations. It is important to keep detailed records of these activities and keep them within the UAE. Following these requirements and thoroughly assessing and addressing core income-generating activities will contribute to operative ESR compliance, lessen the risk of penalties, and ensure adherence to regulatory standards.
ESR Administrative Penalties
Below is a list of Administrative penalties for Economic Substance Regulation non-compliance
1: Penalty for not Submitting an ESR Notification
Non-compliance with ESR notification submission in the UAE accrues an administrative penalty of AED 20,000, as specified in Article 13 of Cabinet Resolution No. 57 of 2020.
Upon validation of the violation, the authority quickly notifies the entity about the imposed penalty, highlighting the importance of complying with the ESR notification requirement.
2: Penalty for failure to submit an Economic Substance Report
Failure to submit the Economic Substance Report and essential information or documentation may accrue an administrative penalty of AED 50,000 in accordance with Cabinet Resolution No. 57 of 2020 as stated in Article 14. Entities are obligated to fulfil these reporting requirements to comply with the Economic Substance Requirements.
In case the same violation occurs in the successive Financial Year, resulting in the first offence, a higher penalty of AED 400,000, as per Article 14, will be executed. It is imperative to note that repeated violations lead to augmented financial repercussions in the form of penalties.
To navigate ESR compliance requirements and minimize penalties, it is advisable to consult top ESR consultants in Dubai such as Farahat and Co., who can provide proficient guidance on ensuring compliance with the Economic Substance Regulations.
3: Administrative Penalty for failure to meet the Economic Substance Test
In the UAE, businesses involved in Relevant Activities must meet the Economic Substance Test to ensure compliance. For the first year of non-compliance, a penalty of AED 50,000 will be executed. Though, it is important to note that recurrent violations in subsequent Financial Years entail an expressively higher administrative Economic Substance penalty of AED 400,000, as specified in Article 14 of the same resolution.
4: Administrative Penalty for Filling Wrong Information
Licensees and exempted licensees must ensure the submission of accurate information and apt documentation to the Regulatory Authority. Noncompliance with this accrues a penalty of AED 50,000, as outlined in Article 15 of Cabinet Resolution No. 57 of 2020.
Correct reporting and clear communication with the Regulatory Authority are important for businesses in the UAE to ensure compliance with regulatory requirements. Filing indecent information or cover-up knowledge of errors can lead to financial penalties and potential reputational damage. So, it is essential for Licensees and exempted licensees to prioritize the accuracy and truthfulness of their submitted information.
Seek the expert services of ESR Consultants in UAE
To avert administrative penalties for ESR purposes, it is advisable for licensees to seek the services of ESR Consultants in UAE. Therefore, contact us today and we shall be glad to assist you.
Syed Hassan Ali carries with him an experience of 13 years in providing legal guidance and consultancy. He is a holder of two degrees, one in Business Management and the other in Economics for Engineers and Scientists. He carries an in-depth knowledge of the UAE market and continues to be an asset to businesses, providing clarity regarding applicability of the ESR regulations as well as guide them in making informed decisions.