All entities operating in the UAE deal with the Federal Tax Authority regarding their taxes and other economic substance regulations. The Federal Tax Authority of UAE is responsible for enabling the federal tax regulations under any economic activities in the country by pursuing its responsibilities based on Cabinet Resolution No. 57 for ESR in UAE. The FTA is involved in ensuring the application of regulations that govern the collection of income tax. One of the important roles performed by the FTA regarding income tax collection is acting as the National Assessing Authority for the Economic Substance Regulations. The ESR regulations are mandatory for businesses that perform relevant activities in the UAE. It helps in minimizing tax fraud, preventing abuse, and making sure people pay for the services and goods they sell.
Here we will discuss the leading responsibilities of FTA.
1. Assessment of Whether The ESR Test is Met
The purpose of the assessments is to guarantee that licensees and exempted licensees are carrying on their relevant activities in the UAE in a way that fulfills the economic substance requirements under the resolution as mentioned in Article 7 of resolution no. 57. The assessment will consider factors such as the location of the licensee’s or exempted licensee’s core income-generating activities, the value of its assets in the UAE, the number of its employees in the UAE, and its expenditure on research and development in the UAE.
If FTA determines that a licensee or an exempted licensee has not met the economic substance test, it may impose one or more of the following sanctions:
- Issue a warning;
- Require the licensee or the exempted licensee to take corrective action within a specified period;
- Suspend or revoke the licensee’s or the exempted licensee’s license
- Impose a fine.
2. Impose the Administrative Penalties
As per articles 13,14 & 15 of resolution no.57, the following ESR penalties and offenses should be governed by FTA regarding ESR regulations.
- It will impose 20,000 dirhams in a case of failing in ESR notification. It should notify licensees or the exempted licensee about the things including reasons for inflicting administrative penalty, total amount, and due date that should not be less than 30 business days after issuing a notification.
- A penalty of 50,000 dirhams will be imposed in a case when:
(a) Licensee or Exempted Licensee fails to provide an economic substance report or any relevant evidence and documentation that is obliged for ESR reporting.
(b) Economic substance test is not met for any financial year.
Secondly, FTA also has to notify the licensee or exempted licensee about the reason behind the administrative penalty which in this case is failing of economic substance test, the net amount that has been charged, and the due date through the ESR penalty email from FTA.
3. Decide On Appeals
In case if Licensee receives an ESR penalty email from FTA, according to article 17 of Resolution No. 57, the licensee or exempted licensee may appeal against the administrative penalty imposed by FTA on the following grounds:
- It did not perpetrate violations associated with it.
- An administrative penalty inflicted surpasses the restrictions prescribed in the law.
The right of appeal against the administrative penalty is a legal right that allows an individual to challenge a decision made by a government agency or official. This right is typically enshrined in law and provides individuals with a mechanism to seek redress if they feel that they have been treated unfairly or unjustly.
It allows individuals to have their cases heard by an impartial body and provides a check on the exercise of discretion by government agencies.
4. Carrying out reporting requirements
If upon a licensee’s appeal against the penalty email, the National Assessing Authority deduces that a licensee does not meet the economic substance test then the licensee will not have any chance of appealing again and will ultimately have to comply with any orders set out in the original findings.
If on the other hand, the National Assessing Authority determines that a Licensee meets their EST then they are required to submit all documentation they have relating to the said licensee to the relevant regulatory authority. If the relevant agency has further questions, they must be answered within one month under penalty of law.
Can I Count the FTA (Federal Tax Authority)?
FTA has designed an email address which enables the licensees to reach the authority for the queries related to Economic Substance Regulations.
You can contact the FTA through FTAESR@tax.gov.ae.
Additionally, you can visit the Ministry of Finance ESR Dashboard on the link given below. Here, you can pertain to Economic Substance Regulations appeal request.
Choose the best services
Businesses remain concerned about penalties and similar circumstances that they might face in the process of complying with ESR regulations. Fortunately, there is a way to minimize these difficulties i.e, outsourcing. Fulfill your ESR requirements with our expert guidance and services.
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).