According to Cabinet Resolution no. 57 and Ministerial Decision no. 100 of 2020, an ESR assessment is performed by the National Assessing Authority to assess whether or not a business in the UAE meets the economic substance test. It is a mandatory requirement for all the businesses in the UAE that fall under the definition of relevant activities as described by the ESR in UAE. These relevant activities mainly comprise distribution and service center business, intellectual property business, holding company business, shipping business, headquarters business, lease/finance business, investment fund management business, insurance business, and banking business. There are further core income generating activities that are performed under all these relevant activities, however, the ministry has not specified any CIGAs in the decisions.
How does ESR Assessment work?
Economic substance regulations assessment is a procedure by which it is assessed whether or not an entity or a business has met the ESR test for a relevant financial year. You need to understand the following points regarding this assessment;
- National Assessing Authority is the one that performs the whole assessment at the end of the financial year.
- The assessment procedure is performed after the submission of the ESR notification and ESR report. With the help of the data provided by the business in the notification and report, the National Assessing Authority determines whether or not the business meets the ESR test.
- In normal circumstances, the assessing authority is allowed to have a time period of six years to perform the assessment right after the end of a single reportable year. After this time period, no assessment will be done for that particular year.
- The time period of six years is not applicable if certain factors contribute to the process i.e, gross negligence, fraudulent actions, misinterpretation, etc. The authority can be given more time if the process falls under these cases.
- In the case of the high-risk IP licensees, the authority will require plenty of information before announcing any decision. Not providing sufficient information can result in failing the assessment.
- After the complete procedure of assessment, the National Assessing Authority will declare its decision to notify the licensee whether or not he has met the ESR test.
Requirements to Pass the ESR Assessment
ESR regulations in the UAE have put forward the following requirements of the Assessing Authority which are mandatory to be fulfilled in order to pass the assessment process and meet the ESR test successfully;
- The licensee needs to perform sufficient relevant activities and its core income generating activities in the UAE.
- The licensee needs to make sure that all these activities are managed and executed within the United Arab Emirates.
- Every licensee performing a relevant activity needs to employ an adequate number of employees to work for the business. These employees can be temporary or permanent but they should ensure their physical presence in the UAE.
- In case a licensee has outsourced any of the core income generating activities to external agents, the adequate control and supervision should belong to the licensee only and not to the external agent. These outsourced agents should be executing CIGAs for the licensee within the UAE. Also, an adequate number of employees and resources need to be ensured in case of outsourcing.
- It is important for the licensee to actively perform management activities such as conducting adequate meetings of the board of directors of the business to improve the state of the business. The physical presence of the board of directors is also mandatory in meetings along with all the directors being qualified for their job. The minutes of the meeting should be recorded and signed in written form and should never leave the UAE.
- The assessment process can be performed in the case of a licensee who has not earned any relevant income in a relevant reportable period, but it is not mandatory for such a licensee to meet the ESR test.
Is Assessment Done for Exempted Licensees?
The licensees that have been proven to be exempt for a relevant financial year do not need to go through the assessment process in order to meet the ESR test. The only requirement for an exempted licensee is to file a notification and prove its exempted status. In case a licensee fails to provide enough evidence to prove its exempted status, it will be considered to have failed the ESR test.
What If a Licensee Fails ESR Assessment in UAE?
A licensee that fails to pass the assessment process and meet the ESR test shall be subjected to a penalty of 50,000 AED as per the Cabinet Resolution no. 57. If a licensee fails an ESR test subsequently for more than one year, he shall be subjected to a penalty of 400,000 AED.
Choose Economic Substance Regulations
ESR procedures are difficult to understand by most business owners and they end up making errors during notification filing or reporting because of the lack of knowledge. This results in hefty penalties as discussed above. In order to save your business from making terrible mistakes that can attract huge penalties, choose Economic Substance Regulations to help you through all these procedures. Our qualified experts would never let you fail at any stage of ESR in the UAE.
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.