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Economic Substance Regulations

Economic Substance Regulations Reporting in UAE

On 30 April 2019, the Economic Substance Regulations were issued by the United Arab Emirates in accordance with the Cabinet of Minister Resolution Number 31 of 2019. Moreover, assistance for the application of ESR regulation UAE was also proposed on 11 September 2019 in accordance with Ministerial Decision Number 215 of 2019. Amendments to the ESR Regulations UAE were made on 10 August 2020 by Cabinet of Minister Resolution Number 57 of 2020, and assistance for the application of those amended ESR regulations was issued on 19 August 2020 by Cabinet of Minister Resolution Number 100 of 2020. ESR maintains and illustrates the economic presence of onshore and free zone companies who practice any of the “Relevant Activities” listed in the UAE relative to the Economic Substance Test.

The Relevant Activities include:

  1. Banking Business
  2. Insurance Business
  3. Investment Fund Management Business
  4. Lease-Finance Business
  5. Shipping Business
  6. Holding Company Business
  7. Intellectual Property Business
  8. Headquarter Business
  9. Distribution and Service Centre Business

Economic Substance Report

Licensees are required to meet the requirements of the Economic Substance Test and submit an Economic Substance Report which includes information and documentation mentioned in the ESR Regulations within the period of the relevant Financial Year.

After that, the National Assessing Authority is required to issue its decision to show whether a Licensee has met the Economic Substance Test requirements within a six-year limitation period which is started at the end of the relevant Financial Year.

However, this limitation period will not be applicable if the NSA did not issue its decision within a year’s limitation period because of the negligence, fraud, or deliberate misrepresentation by the Licensee or any other person representing the Licensee.

Under Economic Substance Reporting  carried out by the companies of Dubai, UAE that undergo the Relevant Activities are required to report;

  • If they are carrying out a relevant activity in the United Arab Emirates.
  • If any revenue is subjected to tax outside the United Arab Emirates.
  • The date of the financial year

This annual report is to be submitted by the companies to the respective Regulatory Authority each fiscal year to show that they are carrying out the Relevant Activity. Under Economic Substance Regulations UAE, it is compulsory to submit the details of the Relevant Activity, revenue, expenditures, and resources that show whether the Economic Substance Test of UAE is met.

Read more about : Relevant activities under Economic Substance Regulations in UAE

Requirements for Economic Substance Reporting in UAE

According to ESR Regulations UAE, some of the major measures the organizations need to take  for Economic Substance Reporting before the end of each fiscal year include:

  • Firstly, to undergo an assessment of the Relevant Activities that were carried out during the fiscal year to make sure that the fiscal statements give a comprehensive, relevant, and correct illustration of transactions and operations.
  • The assessment of the quantity as well as the kind of revenue produced from the Relevant Activity during the fiscal period.
  • To hold Board of Directors meetings who are actually present in the United Arab Emirates.
  • To sign and maintain the Board of Directors meetings’ minutes of meeting in the United Arab Emirates.
  • The assessment of the quantity and kind of expenditures and the United Arab Emirates-based resources which are related to the Relevant Activity.
  • ESR Regulations require that the companies ensure their access to resources through contracts & financial records.
  • ESR Regulations UAE also require the companies to verify the number of United Arab Emirates-based full-time employees who are related to the Relevant Activity.

Assessment for Economic Substance Reporting in UAE:

Economic Substance Regulations require the businesses that are registered in Dubai, UAE to use the substance over form approach which means that the financial statements give a comprehensive, relevant, and correct illustration of transactions and operations to verify that either they carry out a Relevant Activity or not. For this, the companies need to carry out an assessment of the events related to their registration certificates as well as assess the events that took place during each financial year.

As per the ESR Regulations UAE, businesses might take one or more Relevant Activities during the same financial year. Therefore, the companies of Dubai, UAE need to verify the Economic Substance Report for each set of events unless and until the events are secondary to the main Relevant Activity.  The ESR Regulations also permit strengthening the secondary events under the main Relevant Activity which ultimately ensures that there is no duplication in the Economic Substance Reporting.

Penalties for Failed Compliance with the Economic Substance Reporting in UAE

In case the companies of Dubai, UAE fail to comply with the Economic Substance Reporting then the ESR Regulations may charge penalties from the Regulatory Authorities in UAE. AED 10,000 to AED 50,000 will be charged as a penalty on the companies that:

  • Fail to file the notification
  • Fail to reach the needs of substance over form approach.
  • Fail Economic Substance Reporting in UAE.
  • Fail Economic Substance Reporting in Dubai, UAE for the relevant Fiscal Year.

A penalty of up to AED 30,000 will be imposed if the companies repetitively fail Economic Substance Reporting in UAE. Moreover, repetitive failures may also lead to delay, retirement, or no restoration of a commercial license. For more details contact Economic Substance Regulations Today.