Economic Substance Regulations are a set of rules, regulations, and requirements that are meant to follow by some businesses in the UAE. The purpose of ESR is to regulate and monitor the activities of some businesses for the improvement of the economy of the country and for tax regulations. The process of monitoring is done by the regulatory authorities that make sure that the businesses are constantly complying with the ESR regulations. Any business that fails to fulfill certain requirements of ESR receives penalties from the National Assessing Authority. In order to avoid penalties, businesses should carefully determine the applicability of ESR to them. Following key points can help you avoid ESR penalties for misunderstanding ESR applicability;
Know the Relevant Activities you Perform
First of all, you need to know whether or not you are performing a relevant activity in the UAE. If your business is executing one of the nine relevant activities, it clearly falls under the scope of ESR and has to comply with its requirements. These relevant activities are intellectual property business, shipping business, headquarters business, investment fund management business, banking business, service center business, holding company business, lease/finance business, and insurance business. A business that performed a relevant activity in a relevant financial year is termed a licensee. A licensee has to fulfill all the requirements of ESR including the submission of notification and report.
Relevant Activities Outside the UAE
Any business that performs a relevant activity and provides services to foreign customers or groups needs to comply with the ESR, for instance, if a UAE trader is buying or selling products to a foreign group, it still falls under distribution business in the UAE and compliance with ESR is needed. Sometimes businesses provide services outside the UAE but forget to include the details in the report and as a result face penalties. If a licensee runs a branch in a foreign country, it needs to include its details while reporting or notifying the relevant authority. There is only one case in which a non-UAE branch of a business does not need to comply with the ESR i,e if it is subject to tax in the jurisdiction of the country where it operates. If a licensee provides services in any foreign country without paying tax in that jurisdiction, it must comply with ESR requirements in the UAE.
Each financial year is considered a reportable year which means that the ESR requirements such as submission of notification or report are needed to be done every year. For this reason, a yearly assessment of all the relevant activities executed by the business whether inside or outside the UAE is important to know the exact applicability of Economic Substance Regulations. The required submissions to the regulatory authority must be done within the due date every year in case of both notification and report. Also if a business is going to be liquidated during a financial year, it is still required to report for the activities it executed during that period.
Read more : Ways of filing ESR Notifications & Report
Status of Licensee or Exempted Licensee
The business needs to determine whether or not it comes within the definition of exemption. The licensee that considers itself exempted is not completely free from the requirements of ESR in UAE. The exempted licensees also need to notify the regulatory authorities just like the licensees do. The filing of notification is where the licensee mentions itself to be exempted with supportive evidence. If a business claims to be exempted but fails to provide evidence, it will not be considered exempted and will receive penalties. It is important to carefully determine whether your business has been exempted for a relevant reportable period or not. Following are all the cases for which a business is considered as an exempted licensee;
- A licensee is considered to be exempted if it has not earned any relevant income from the relevant activity.
- A licensee is considered to be exempted if it is owned by UAE residents or UAE nationals that execute the business in the UAE only and do not work with any multinational company.
- A licensee is considered to be an exempted licensee if it is an investment fund that has not earned any relevant income in the particular reportable period.
- A licensee is considered to be exempted if it is a holding company business of an investment or a particular purpose vehicle that has not earned any relevant income within the particular reportable period.
- A licensee is considered to be exempted if it operates in a country other than UAE and pays tax in the jurisdiction of that country.
- A licensee is considered to be exempted if it operates in the UAE as a branch of a foreign company and pays tax in the jurisdiction of that particular foreign country.
What type of penalties can you receive?
In accordance with the Cabinet Resolution no. 57, the following are the penalties that a licensee or exempted licensee can possibly face upon non-compliance with ESR regulation;
- A licensee can face a penalty of 20,000 AED if it fails to submit the ESR notification within the due date.
- A licensee can face a penalty of 50,000 AED if it fails to submit the ESR report within the due date.
- A licensee can face a penalty of 50,000 AED if it submits the ESR report but fails to include the required information or documents.
- A licensee can face a penalty of 50,000 AED if it fails to meet the ESR test for some reason.
- A licensee can face a penalty of 400,000 AED if it fails to meet the ESR test for the second time in the year consequent to the year when it failed once.
Choose the Best Services
If you have additional queries about penalties due to non-compliance with Economic Substance Regulations, ask our experts for complete guidance. Complying with ESR requirements is a difficult task and even minor mistakes can result in penalties. If you want to run your business without the stress of ESR compliance, let our expert service providers help you out with it.