Economic Substance Regulations in the UAE is a principle and law that requires a business license holder to adhere to Economic Substance Return on the gross income generated from their relevant activity. The ESR law for holding companies, along with other licensed companies, was adopted in 2019.
When it comes to filing Tax and Tax returns, certain companies wish to find loopholes within the current law system to manipulate their financials. Such manipulation of data not only is illegal but also a risk to the company’s reputation. The companies there need to notify the FTA about their relevant activity, identify if it is under the scope of ESR and file the ESR return as per the law.
Defining a Holding company under the Economic Substance Regulations of UAE
- An entity in the UAE is considered a holding company when it meets the below criteria.
- The company holds inquiry interests in juridical persons.
- It only earns dividends and capital gains from its equity investments.
- Hence a company in the UAE that holds assets and has other income streams apart from dividends and equity is not considered a holding company.
Economic Substance for a holding company
In the case of a holding company, even an investment fund company is not considered a holding company due to its reduced substance requirement.
A holding company must comply with the regulations of the licensee. Have an adequate number of employees and physical assets. It doesn’t have to be directed and managed in the UAE
It doesn’t have to disclose adequate expenditure in the UAE, which is necessary. To classify as a holding company, a company in the UAE can be a mainland, free zone company for RAKEZ, DIFC, JAFZA, DAFZA etc., not conducting any commercial activity within the UAE. The core income-generating activities of a holding company
Section 3 of the Relevant activities guide mentions the CIGA of any form such as assets or dividends earned or any other source of income.
Under section 3.7, it states Holding company is defined by its activity of only holding an equity interest in one or several companies. It generates its income from equity interests or derives dividends from the equity investments.
Thus, the CIGA has its dole function as acquiring and holding equitable interests o shares in one or more companies.
An entity must clear the Reduced Economic Substance Test to qualify as a holding company. Reduced ESR is for companies with pure equity holding activities.
Penalties for non-compliance of ESR
A fine of AED 50,000/- is levied for failing to conduct tests and submitting a report in the first year.
A fine of AED 400,000 is levied in the second year if the company fails to submit the ESR report and conduct the tests.
A separate fine of AED 50,000 is levied for providing inaccurate information to the FTA.
A fine of AED 20,000 in case of failure to submit a notification
License revoked due to repeated non-compliance.
Five Reasons why you or your company should have a professional accounting service for ESR Filing;
To accurately track & monitor the economic activities.
Companies in UAE, including the ones in free zones, are subject to ESR Filing. Hence, if you are confused and want an expert opinion to identify and distinguish the relevant activities under the scope of ESR, you must look for professional accounting services. In case of any issues with the misrepresentation of financial data or error in reporting, it will only lead to penalty fees. Economic Substance Regulations are one of the most renowned accounting, and audit service provides in the UAE.
To accurately manage the reporting and notification to Regulatory Authorities
Once the identification or ESR regulation is completed, it must be filed at the right time with accurate data. ESR filing is relatively new in the UAE and has specific deadlines and standards that companies need to be at par with. Chartered accountants or expert accounting professionals in Dubai ensure that your company abides by these standards.
To provide you with better consultancy
Whether your company is an onshore, offshore, or free zone entity, it must comply with the Economic Substance Notification. If the company falls under its scope, it is further required to file the returns. For the same reasons, a company must evaluate and structure t operating models and corporate governance. An accounting firm in Dubai or Accounting service providers in UAE can help you with these evaluations and help strategize your operational model.
To avoid conflict of interest
It is an opportunity for companies to get a better understanding of the financials from a third party. There is no direct or indirect vested interest of employees from within the company. Hence you can expect even more accuracy. Click here to speak to us today!
An ESR test is a must for holding companies in the UAE. ESR consultants help you identify your holding companies relevant activities and report the ESR Test notification. If you’re looking for further information on how to prevent penalties for ESR notification failure, Get in touch with us right away.