In April 2019, the United Arab Emirates initiated the economic substance regulations to fulfil its commitment to preventing illegal tax practices in the UAE such as tax evasion. In August 2020, the Cabinet of Ministers Resolution no. 57 further amended these regulations for improvement. In addition, Ministerial Decision no. 100 legally implemented these regulations and explained them in depth for businesses who execute one or more than one relevant activities in the UAE. The EU CoCG (European Union Code of Conduct Group on Business Taxation) and OECD (Organisation for Economic Development and Cooperation) have also approved these ESR regulations. Read ahead to understand the ESR regulations better.
Following is a list of frequently asked questions about ESR in UAE;
The ESR regulations were enacted by the government of the UAE in order to follow the standards set by the OECD that work for the prevention of harmful and illegal tax practices. These standards acquire all the entities in the global world to perform their activities substantially in their particular jurisdiction. UAE remained on the list of non-cooperative jurisdictions of the European Union before introducing the ESR regulations. By enacting these regulations, UAE has become a safe business destination and a secure labour market.
The Assessing Authority is a government body that performs assessments in order to evaluate whether or not a business performing a relevant activity in the UAE meets the ESR requirements. Assessment is only done for the active licensees, however, the exempt businesses do not go through the assessment process. The assessment starts with reporting which is also not required in the case of exempt businesses. The only responsibility of the exempt businesses is to file a notification in which they prove they fall into the category of exemption.
Any business that goes through the assessment process and fails the ESR test is labelled as non-compliant with the ESR regulations. Sometimes, businesses consider themselves exempt from ESR regulations and fail to provide evidence when it comes to filing a notification. Such a type of business is also considered non-compliant. Moreover, businesses can also be labeled as non-compliant if they accidentally provide incorrect information during the process or make any error. A business that fails the ESR assessment will be subject to a fine of fifty thousand AED as per the provisions of the Ministers Resolution no. 57.
Businesses who miss due dates of filing and reporting attract an ESR penalty easily. Penalties are applicable whether a business misses the deadline of the notification or report submission. Additionally, missing the due date of submission of a penalty will impose another penalty on the business. According to the Ministers Resolution no. 57, a 20,000 AED penalty will be imposed in case of submitting a notification after the due date has passed and a 50,000 AED penalty will be imposed in case of submitting a report after the due date has passed. Therefore, it is vitally significant to note the deadlines. Businesses can seek help from outsourced service providers if they find ESR requirements difficult to fulfil.
There are definite due dates for the submission of the ESR report and notification. Both the notification and the report need to be submitted individually with different due dates. The due date of submitting a notification is 6 months from the year-end of a reportable year, however, the due date of submitting a report is 12 months from the year-end of a reportable year. Businesses miss out on these deadlines and, as a result, face penalties. Businesses, that find it difficult to follow due dates, can simply acquire assistance from outsourced providers.
Read more: Ways of Filing ESR Notifications and Report
No, the UAE government bodies do not fall under the scope of ESR and are not subject to ESR requirements. Moreover, any entity that is completely or partially owned by the government or federal authorities is also not subject to the requirements of ESR. For entities that are partially owned by the government or federal authority, it is mandatory that the government owns at least 51 percent of them.In addition to government entities, those businesses that are owned by UAE residents are also not subject to ESR regulations in the UAE.
As per the provisions of the ESR regulations, entities that perform a relevant activity in the UAE but do not earn any income in a single reportable year are considered exempt. ESR requirements are not applicable to such exempt entities that have earned 0 AED in a single reportable period. Such entities will be considered exempt for that particular year only.
There are many huge businesses in the UAE that operate branches in different parts of the UAE and in foreign countries. For the UAE branches, it is not mandatory for the branches to individually perform ESR obligations, however, the parent office is responsible to submit notifications and reports for each branch that is being operated inside the UAE. Branches that operate in foreign countries but have the parent office in the UAE are only subject to ESR requirements if they do not pay tax in the particular foreign jurisdiction.
Many business owners find the requirements of economic substance regulations difficult to accomplish. The reporting and filing requirements can often go wrong and attract harsh circumstances for the business. To avoid such complications, businesses prefer to seek help from third-party service providers in order to make the notification filing and reporting procedure easy. If your concerns are the same then you are at the right place. Choose our qualified services and stay compliant with the ESR regulations in the UAE. For additional queries, contact our experts for the utmost guidance and support.
Bola Olaoye is a Legal Senior Associate and holds an LLB from Adekunle Ajasin University as well as a Bar Certificate from the Council of Legal Education. With experience spanning 14 years, she knows the ins and outs of UAE’s laws and practices and has helped provide clear and concise guidance to clients on the appropriate law-abiding measures to be taken concerning Economic Substance Regulations (ESR).