The Economic Substance Regulation was implemented on 1st January 2019. Under the new law, companies must follow essential steps in compliance with the ESR standards.
- The compliance with notification
- Filing annual substance return
ESR is supervised by relevant Regulatory Authorities, and hence there are slight differences when it comes to filing the ESR returns. This includes different deadlines, documentation requirements and the related penalties for non-compliance.
How Can You file an Economic Substance Regulation Notification?
Several companies before the implementation of ESR in the UAE took advantage of the tax-free status. They moved their profit centres to UAE to avoid paying high taxes to the parent country’s government. This was a disregard for the economic benefits provided by the UAE and a form of tax evasion method used by some companies. ESR in UAE ensures that such activity doesn’t occur by allowing companies to notify them through their relevant activity. A relevant activity is where companies perform the activities mentioned in their trade license and have a standard business setup in the UAE.
What is the Deadline for Filing ESR Notifications and Reports?
- Deadline for Filing ESR Notifications
The Regulatory Authority must receive an ESR notification every year, and the date of financial reporting must be considered appropriately. Irrespective of the company’s Regulatory authority, such as mainland business, free zone, or offshore business, the following companies are to comply with the ESR in the UAE if they conduct the following:
- Banking Business
- Lease finance Business
- Holding companies
- Intellectual properties
- Insurance Business
- Headquarter business
- Shipping Business
- Investment Fund management Business
- Distribution and Service Centre Business
Hence any income is generated from the above activities, and the licensee falls under the scope of Economic substance regulation (ESR) filing.
If the company undertakes any one or more of the activities mentioned above during the financial year, it is crucial for the company to be ESR Compliant by:
- Filing ESR Notification in less than 6 months from the end of the financial year.
- Conduct an ESR test and provide the report to the concerned authority in less than or within 12 months or 1 year from the end of the financial year.
The below due dates are for ESR filing and reporting for the Company having financial year:
|FINANCIAL YEAR ENDING ON||DUE DATE FOR NOTIFICATION||RETURN DUE DATE|
|31st Dec 2021||30th Jun 2022||31st Dec 2022|
|30th Jun 2021||31st Dec 2021||30th Jun 2022|
What Are the ESR Penalties for Non-Compliance of Notifications & Report Filing?
- An administrative ESR penalty of AED 20,000 will be imposed on a licensee or exempted licensee who fails to submit a notification (and any relevant documentation or information) subject to the provisions under Article 13 of Decision 57.
- In case the licensee or exempted licensee forgets to submit the Economic Substances Regulations Report and any documentation or information and fails to meet the Economic Substance Test for each financial year, an administrative penalty of AED 50,000 shall be imposed.
- If the licensee or exempted licensee commits the same violation in the same financial year immediately following the financial year in which the violation was carried out, he shall be charged or obliged to incur an ESR Penalty of AED 400,000.
If the licensee or exempted licensee provides the regulatory authority or National assessing authority inaccurate data and is aware at the time of the inaccuracy but fails to communicate this with the regulatory authority or National Assessing authority at the time when such inaccuracy was discovered, then a penalty of AED 50,000 shall be charged.
Why Select an ESR Expert to Conduct Your ESR Reporting?
Businesses must ensure that the ESR notification and reporting are done before the deadline. Since ESR is a relatively new concept in the UAE, many companies still find it challenging to identify their core income-generating activities. Additionally, being unaware of penalties on various levels is an extra cost that can be avoided. Using an experienced accounting service from qualified Chartered accountants in the UAE gives you an extra edge in financial reporting.
Our expert ESR consultants provide end-to-end services for ESR Reporting. Also, they will give remedial measures and guidance for the economic substance regulation assessment, so the relevant activity is categorized as per your license. They also hold relevant experience and expertise in helping your business identify the relevant ESR activities and file for notification without an error in submission deadlines and reporting.
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).