The Economic Substance Regulations (ESR) were introduced in the United Arab Emirates (UAE) in 2019 to ensure that companies operating in the country have a substantial economic presence and are not just using it as a tax haven. The regulations require companies to demonstrate that they have real activities in the UAE, and failure to comply with the regulations can result in penalties. In this article, we will discuss the penalties related to the Economic Substance Regulations in UAE.
Requirements of Economic Substance Regulations
The Economic Substance Regulations require companies that carry out certain activities in the UAE to demonstrate that they have adequate economic substance in the UAE by satisfying specific criteria, such as conducting core income-generating activities, being directed and managed in the UAE, and having adequate employees, expenditures, and physical assets in the country. The regulations apply to companies that carry out the following activities:
- Banking
- Insurance
- Investment fund management
- Lease-finance
- Headquarters
- Shipping
- Holding company
- Intellectual property
Companies that carry out any of these activities are required to submit an Economic Substance Notification to the regulatory authority within six months from the end of their financial year. They are also required to submit an Economic Substance Report (ESR) within 12 months from the end of their financial year.
Read More: How Economic Substance Regulations Ensure Transparency and Accountability
Penalties for Non-compliance with Economic Substance Regulations
The penalties for violating the Economic Substance Regulations in the United Arab Emirates are outlined in Cabinet Resolution No. 57 of 2020 concerning Economic Substance Requirements. The penalties are as follows:
Failure to submit Notification
Under Article 13 of Cabinet Resolution No. 57 of 2020, a penalty of AED 20,000 will be imposed on a licensee or exempted licensee that fails to submit the ESR notification and relevant information or documents within six months from the end of the financial year, unless the competent authority extends the date.
Failure to meet the Economic Substance Test
Article 14 outlines penalties for licensees or exempted licensees who fail to meet the Economic Substance Test. These penalties include:
- Failure to submit the Economic Substance Report (and any relevant information or documents) within 12 months from the end of the financial year or submitting a report that does not meet the ESR requirements in the UAE will result in a penalty of AED 50,000.
- Repeated violations during the following financial year will result in a penalty of AED 400,000. Moreover, the National Assessing Authority may also suspend, withdraw, or refuse to renew the entity’s trade license for repeated non-compliance.
Providing inaccurate information
Article 15 stipulates that a penalty of AED 50,000 will be imposed on a licensee or exempted licensee that provides inaccurate information about the ESR when aware of its inaccuracy at the time of submission or fails to notify the regulatory authority or the National Assessing Authority when the inaccuracy is discovered after submission.
Time frames for applying penalties
The penalties for non-compliance with the ESR can be imposed up to six years from the date of committing the violation unless it results from fraud that prevents the National Assessing Authority from imposing the fine. However, the time frame for imposing a penalty for providing inaccurate information is 12 months from the date the National Assessing Authority becomes aware of the violation unless it is caused by fraud.
Exchange of information with foreign competent authorities
In cases where a licensee or exempted licensee is subject to penalties under Articles 14 and 15, the National Assessing Authority will exchange information with the foreign competent authority of the parent company, ultimate parent company, and ultimate beneficial owner.
Table of Penalties Related to Economic Substance Regulations
| Ref | Article | Penalty | Penalty Amount | Time frame to apply the penalty |
|---|---|---|---|---|
| 1. | Article (13) | Failure to submit ESR notification | AED 20,000 | 6 years from the date of committing the violation |
| 2. | Article (14) | Failure to submit ESR Report | AED 50,000 (first violation) and AED 400,000 and other administrative measures such as suspension, withdrawal or non-renewal of the trade license, (repeated violations) | 6 years from the date of committing the violation |
| 3. | Article (15) | Providing inaccurate information | AED 50,000 | 12 months from the date the National Assessing Authority became aware of the violation |
Avoiding Penalties for Non-Compliance with the Economic Substance Regulations:
Companies can avoid penalties for non-compliance with the Economic Substance Regulations in the UAE by taking the following steps:
- Ensure economic substance by conducting core income-generating activities, having adequate employees and expenses, and owning physical assets in the UAE.
- Submit required notifications and reports to the relevant regulatory authority accurately and on time.
- Seek professional advice from tax or legal advisors with expertise in the ESR if unsure about compliance.
- Consult with the relevant regulatory authority for guidance on specific circumstances.
- Conduct periodic reviews of operations and governance structures to ensure ongoing compliance.
- Commit to transparency, good governance, and a genuine economic presence in the UAE.
By following these steps, companies can avoid penalties for non-compliance with the ESR and operate in a sustainable and responsible manner.
Consult ESR Consultants in UAE
The penalties for violating the Economic Substance Regulations in the UAE are significant and serve as a deterrent to ensure compliance. Failure to comply with these regulations can result in significant fines, administrative measures, and the exchange of information with foreign competent authorities. Therefore, it is essential for companies to seek professional advice to ensure that they are complying with the regulations and should maintain appropriate records to demonstrate their compliance.
Read More: Economic Substance Regulations in the UAE: Understanding Offenses and Penalties
