The UAE government introduced the Economic Substance Regulations (ESR) to curb harmful trade practices. Economic Substance Regulations in Dubai is a set of rules, regulations, and requirements that apply to particular businesses.
What is the main objective of Economic Substance Regulations in Dubai? The primary objective of ESR is to regulate & monitor the activities of all onshore and free zone legal entities while boosting the economy. Additionally, the law has been introduced to ensure that the relevant organizations adhere to the applicable tax regulations.
One of the primary requirements of ESR is that companies carrying out relevant activities must report to the authorities every year.
The National Assessment Authority will impose hefty fines on companies that fail to meet the conditions of the Economic Substance Regulations law in UAE. To avoid penalties and remain compliant with Economic Substance Regulations, businesses must understand how ESR applies. The following points will share some relevant information to understand ESR and how businesses can avoid penalties.
Understand the Relevant Activities Your Company Performs
Know whether your company performs a relevant activity in the UAE. Nine relevant activities fall under the purview of Economic Substance Regulations in Dubai, and businesses indulging in these activities must meet Economic Substance Regulations requirements. What are these business activities? Let us list them for you.
- Intellectual property business
- Shipping business
- Headquarters business
- Investment fund management business
- Banking business
- Service center business
- Holding company business
- Lease/finance business
- Insurance business
Businesses carrying out the above activities are called licensees & they need to meet all the ESR requirements like submitting notifications, reports, etc.
Relevant Activities Outside the UAE
Even if a UAE-based business conducts relevant activities outside the country by providing services to foreign clients, Economic Substance Regulations apply to them. UAE-based companies selling goods/services to overseas clients are in the distribution business. Hence ESR will apply to them.
Suppose a business provides goods/services to foreign clients but fails to mention the details in the report; he will have to pay a massive penalty. Licensees who conduct business in other countries under the same business name (overseas branch) must mention the details when presenting the report to the authorities.
There is only one exception to the above rule. A UAE-based business operating in a foreign country subject to the host country’s tax regulations is exempt from Economic Substance Regulations in Dubai. However, if the foreign branch does not have to pay taxes to the foreign country’s government, ESR rules will apply.
Businesses must report their activities to the authorities every year. They must meet ESR’s requirements by submitting reports and notifications. However, to fulfill these requirements and analyze these businesses’ relevant activities, it is vital to understand Economic Substance Regulations applications.
Businesses must submit notifications and reports to the regulatory authorities before the due date. Even if a business undergoes liquidation during a fiscal year, it must report its activities during that fiscal year.
Exemption from Economic Substance Regulations
It is crucial for UAE businesses to know whether they are exempt from ESR. Even if you are not an Economic Substance Regulations expert, there is no need to panic. NR Doshi & Partners can help you unravel the mystery and ensure proper compliance.
Even exempt licensees are not entirely free from ESR’s obligations. These exempted licensees must notify the regulatory authorities like the non-exempt entities. When filing the notification, licensees must mention if they are exempt and provide supporting evidence to back up their claims.
Without supporting evidence, a business will not be considered exempt, and the authorities will impose penalties on them. Also, businesses must know the exemption period. What are the conditions for a business entity to qualify for exemption? Let us find out.
- No relevant income from the relevant activities qualifies for exemption.
- Suppose a UAE citizen conducts business activities within the UAE and does not work with international corporations. In that case, it can qualify for an exemption.
- An investment fund that does not earn relevant income during the specified reporting period also qualifies for exemption.
- Even an investment/purpose vehicle of a holding company business that has not earned any revenue during the reporting period is eligible for exemption.
- Licensees operating outside the UAE while paying taxes to the host country’s authorities also fall under the exempt category.
- A business that operates in the UAE while being a subsidiary of a foreign company (and paying taxes to its country of origin) is also exempt from ESR.
Deadlines for Economic Substance Regulations in Dubai
The financial year can be different for businesses in the UAE (refer to the table below). An Economic Substance Regulations in UAE report is mandatory for businesses that earn income from relevant activities and are not eligible for ESR exemptions.
Economic Substance Regulations in UAE notifications and ESR notifications are two separate filings, and they are compulsory for businesses that fall under ESR’s purview. Such businesses must submit a notification to the authorities specifying the relevant activities that they have performed and the money they have made from these activities.
They also need to submit an ESR report within 12 months from the end of the financial year. Suppose a business has not earned any income through the relevant activities during the financial year or if it meets the exemption criteria. However, the business must submit a notification if it carries out the relevant activities.
In case the businesses fail to submit a report or notification on time, they will have to incur heavy penalties. Proceed to the next section for more information on penalties.
|Financial Year End||Notification Filing Deadline||ESR Report Filing Deadline|
|March 2021||30 September 2021||31 March 2022|
|June 2021||31 December 2021||30 June 2022|
|September 2021||31 March 2022||30 September 2022|
|December 2022||30 June 2022||31 December 2022|
- The authorities will impose an AED 20,000 on the licensee if it fails to submit the Economic Substance Regulations in UAE notification within the due date.
- An AED 50,000 penalty applies to licensees that fail to submit the ESR report before the due date.
- Licensees who submit the ESR report but fail to furnish the essential documentation/reports may pay an AED 50,000 fine.
- An AED 50,000 penalty applies to licensees that fail to meet the ESR test for a particular reason.
- The authorities will slap an AED 400,000 penalty on licensees that fail to meet the ESR test for the second time in a row.
Now, we will discuss the non-financial penalties. These non-financial penalties include information exchange with the foreign authorities and suspension, revocation/non-renewal of the licensee’s trade license. Entities must understand why these penalties have been issued in the first place and appeal against them properly if they think they have been wrongly penalized.
A single error can result in a penalty, and repeated offenses will lead to heftier penalties. Depending on the Economic Substance Regulations in UAE reading, appeals can be an excellent opportunity for licensees to get more clarity on gray areas.
In cases of non-compliance with ESR, businesses must undertake proactive steps to ensure compliance and prevent subsequent non-compliance.
NR Doshi & Partners Can Help with the Following Economic Substance Regulations Aspects:
- Preparing professional responses to inquiries from the relevant UAE authorities.
- Aid with understanding the appeal process.
- Provide advice related to non-compliance and the necessary steps to ensure compliance while preventing further issues.
We have been in the accounting and finance domain for over 35 years, providing a wide array of financial services, including advice related to law compliance. Based on our experience, it is certain that most of the non-compliance issues arise because the entities are not aware of the requirements of ESR and the absence of monitoring/supervisory steps to ensure compliance with the ESR law.