The Economic Substance Regulation was issued by UAE according to the global standards set by the Organisation for Economic Cooperation and Development (OECD), as well as by the European Union Code of Conduct Group on Business Taxation (EU COCG). A Business in UAE is required to comply with Economic Substance requirements that maintain and illustrates the economic presence of onshore and free zone companies that practice this Relevant Activity relative to the Economic Substance Test.
A business should comply with the Economic Substance Regulations in order to promote business transparency, reduce the illegal practice of taxation by international businesses and assure that the right amount of taxes are being paid by the businesses in the United Arab Emirates. However, if a business failed to comply with the Economic Substance Regulations it can result in hefty penalties, the exchange of information with the Competent Authority, as well as the imposition of sanctions by the National Assessing Authority which includes revocation, suspension or unable to renew the Business trade permit.
A Business Comply with Economic Substance Regulations in three phases
- In the first phase, the National Assessing Authority identifies and assesses the Relevant Activity carried on by the Licensee or Exempted Licensee that is classified under a Business and submission of Economic Substance Notifications by a business to the respective Regulatory Authorities.
- In the second phase, the National Assessing Authority undergoes assessment in order to identify whether a Business meets the Economic Substance Test.
- However, the third phase of business compliance with the Economic Substance Regulations involves the submission of an Economic Substance Report to the relevant Regulatory Authority.
A business should comply with the Economic Substance Regulations by mentioning the exact Core Income Generating Activity and ensuring that the gross income of the business is being generated through the legal and right sources and is reported to their respective Regulatory Authority otherwise the wrong information about the gross income of a business can cause them to pay a higher amount of tax to the government of UAE. In short, the Relevant Activity carried out by a business should have a physical presence in the UAE, regardless of its customers.
Read also : Economic Substance Regulations filing in UAE
Moreover, in order to comply with these Economic Substance Regulations, the concerned business must give complete information about the Relevant Activities to the Regulatory Authority. Failure to undergo compliance will result in the imposition of penalties up to AED 50,000 and if the business committed repeated violations it will cause to impose further financial liabilities such as the suspension or revocation of the Business license. The business organization should also file an Economic Substance Notification to the respective Regulatory Authority about the Relevant activities performed by that business and failure to submit the Economic Substance Notification along with the required supporting documents by the mentioned deadline will cause them to pay a penalty of AED 20,000 provided under Article 13 of Decision 57 for failure to provide a Notification.
If a business does not comply with the Economic Substance Regulations and if it consistently fails to provide required details and supporting documents to the respective Regulatory Authorities, then the National Assessing Authority will not extend the Business License and in certain situations will liquidate the business. This will have a major effect on the country’s economy as it will cause businesses to cease thus effecting the overall government. In order to avoid negative circumstances the business will comply with the ESR Requirements in order to keep the business management strong which will eventually hamper the functioning of the company. In short, a business complies with Economic Substance Regulations in order to stabilize the economy of the United Arab Emirates.
You should know : Economic Substance Regulations Notification Form
Business compliance with Economic Substance Regulations requires the Licensee or Exempted Licensee that is classified under the business to submit their Economic Substance Report by the mentioned deadline otherwise they will pay a penalty of AED 50,000 under Article 14 of Decision 57 for failure to provide an Economic Substance Report. Thus, the fulfilment of ESR Requirements would suspend the businesses that commit unethical business practices and hence pave the way for better business ideas. This creates healthy competition between the business competitors that resides either inside or outside the United Arab Emirates. In short, compliance with the ESR requirements will help increase the profitability of the businesses.
In conclusion, a Business should comply with Economic Substance Regulations in order to meet the standards set by competent international authorities and order to prevent the tax planning strategies of the business organizations from being used to undergo exploitation of the loopholes in tax rules and to avoid paying illegal taxations and to ensure a more transparent tax environment in the United Arab Emirates.
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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.