The Economic Substance Regulations (ESR) were implemented in the UAE in 2019 to guarantee that entities engaged in relevant activities establish a genuine economic presence and conduct real business activities within the country. According to Cabinet Resolution No. 57 of 2020, penalties may be levied on entities failing to adhere to ESR reporting and substance requirements. It is essential for companies to comprehend the potential penalties for non-compliance and to formulate an effective response plan. This article offers a systematic guide on the process of appealing against an ESR penalty.
Economic Substance Regulations Penalties UAE
Penalties for late/missing ESR notification
As per Article 13 of Cabinet Resolution No. 57 of 2020, a penalty of AED 20,000 will be imposed if the ESR notification is not submitted within 6 months of the end of the financial year unless an extension is granted by the competent authority. This penalty applies to companies conducting relevant activities who fail to notify the authority about their business and economic substance in the UAE through the annual ESR notification.
Penalties for late/non-compliant ESR report
A more substantial penalty of AED 50,000 can be imposed under Article 14 if the company fails to submit the annual ESR report within 12 months of the financial year end or submits a report that does not meet the substance requirements. In case of repeated non-compliance for the ESR report in the following year, the penalty amount increases significantly to AED 400,000 along with suspension/withdrawal of the trade license. Submitting inaccurate information in the ESR report also attracts a AED 50,000 penalty under Article 15.
Penalties for providing inaccurate information.
As per Article 15 of Cabinet Resolution No. 57 of 2020 on Economic Substance Requirement, a licensee or exempted licensee that provides inaccurate information to the regulating authority or assessing authority, knowing it to be inaccurate without prompt clarification, will face an administrative penalty of AED 50,000. The assessing authority must then notify the licensee of failing the economic substance test, the reasons for and amount of penalty imposed, and the due date for payment at least 30 business days later.
Read More: What is the Penalty for ESR Notification?
Options to Appeal ESR Penalties UAE
Companies issued with an administrative penalty have the right to challenge it by filing an appeal with the Federal Tax Authority (FTA), which acts as the National Assessing Authority for ESR in the UAE. The key grounds for appeal include:
- The entity did not commit the violation
If the entity believes that it has complied with all ESR requirements and there were no violations, it can appeal on this ground. The entity will need to provide clear evidence and documentation to prove compliance.
- The penalty exceeds the limit
Cabinet Resolution No. 57 of 2020 specifies maximum penalty amounts for different types of violations. If the penalty imposed exceeds this limit, it can be appealed on this ground.
It is essential to meet all deadlines and provide sufficient evidence to support the chosen appeal ground/s. Incomplete or late submissions risk rejection.
Common Mistakes to Avoid
Some common mistakes made in ESR appeals include:
- Failing to clearly identify the chosen appeal ground and not backing it with evidence.
- Providing generic statements without specifically addressing the violation.
- Missing document submission deadlines or providing insufficient documentation.
- Not citing relevant regulations, cabinet resolutions or case examples to strengthen the arguments.
- Making grammatical or factual errors in submission documents.
- Filing multiple or frivolous appeals without valid grounds to only delay penalty payment.
Attention to detail and adherence to procedures is important to avoid the appeal request getting rejected on technicalities.
In summary, filing ESR appeal in UAE requires meticulous compliance with procedures and a detailed, evidence-backed submission. Common mistakes often lead to rejections wasting both time and money. Businesses facing ESR penalties would greatly benefit from seeking guidance from experienced ESR consultants in the UAE. Their expertise can help navigate the complex appeal requirements and regulations, increasing opportunities for penalty reductions or waivers.
Read More: Administrative Penalties for ESR Noncompliance in the UAE
