One of the newest topics in the UAE business world is the Economic Substance Regulations which went into effect on 1st January 2019. However, despite passing a good time, firms and businesses are left with a dilemma because of inconsistent filings and different approaches used by different authorities. Consequently, UAE businesses must seek guidance from someone with a great deal of experience and who continuously monitors announcements/clarifications within the compliance domain. Companies and firms that do not comply with the ESR rules and regulations risk being penalized and have their business licenses suspended.
With the end of the year fast approaching, it is imperative that the concerned companies and licensees conducting relevant activities in UAE by the
Throughout this article, we will answer some of the most commonly asked questions that UAE business owners have regarding ESRs and give a step-by-step guide to the overall ESR process.
What purpose does the ESR Report serve?
Economic Substance Reports are sent to the National Assessing Authority in order to provide them with information about the Licensee as well as their income, expenditures, assets, employees, and governance relating to their Relevant Activities in the UAE. Think of ESR as informing the government about the substance of your activity.
Which UAE businesses are required to submit an Economic Substance Report?
During a Reportable Period, businesses who are not Exempted Licensees and who generate Relevant Income from any of the following Relevant Activities must file an Economic Substance Report:
- Banking Businesses
- Insurance Businesses
- Investment Fund Management Businesses
- Lease-Finance Businesses
- Headquartered Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Distribution and Service Centre Businesses
For additional information and an explanation of each of the above Relevant Activities, please refer to the Relevant Activities Guide, which is in Schedule 1 of Ministerial Decision 100 of 2020.
How to Identify Reportable Period for the purpose of ESR filing?
The Reportable Period refers to the financial period (e.g. 31 December 2020) preceding the financial period (e.g. 31 December 2021) in which the Economic Substance Report is required to be submitted.
Can one Economic Substance Report can be filed for more than one licensee?
The Economic Substance Report must be filed by each Licensee on its own, regardless of whether it is part of a consolidated group for VAT purposes or financial reporting.
In a liquidation scenario, what are the obligations of the Licensee under ESR?
When a Licensee engages in a Relevant Activity in the year of liquidation, the entity or its liquidators should be sure that all of the licensing requirements are met prior to liquidation, including the filing of a Notification and Economic Substance Report.
If the economic substance report contains inaccurate information, what happens?
An economic substance report containing inaccurate or false information will be penalized with AED 50,000. The Licensee may be deemed to have failed the Economic Substance Test for the relevant Reportable Period if they knowingly provide incorrect or false information or incorrectly claim an exemption from the Economic Substance Regulations.
In the Reportable Period, what is a Relevant Income from the Relevant Activity?
Relevant Income refers to the gross income (revenue) the Licensee earned from a Relevant Activity, calculated as indicated in its books and records for the Reportable Period prepared under applicable accounting standards, including income derived from activities conducted outside the UAE.
A Relevant Activity’s gross income is the total of revenues from all sources, including revenues from sales of goods and services, royalties, interest, premiums, dividends, and all other sources of income earned through the Relevant Activity. It is important to understand that income does not refer to nor is it limited to taxable income or accounting profits.
During the Reportable Period, which Operating expenditures are allowed in relation to the Relevant Activity?
According to the Licensee’s records for the Reportable Period, this amounts to the expenditures incurred in order to carry out the Relevant Activity.
The following types of expenditure belong to operating expenditures: payroll, commissions, overhead and administrative spending, travel and transportation, amortisation and depreciation, and rent.
Step by Step Guide:
- Evaluation: To determine eligibility, the firm should ensure the type of activities conducted fall under the relevant list or subset of activities for ESR. A Notification must be filed by the licensee and exempted licensee involved in relevant activity within six months after the relevant financial activity period ended.
- Testing: The next step is ensuring the firm qualifies for the Economic Substance Test. On the Ministry of Finance website, firms can download a template notification and ESR report before submitting it. Firms that are perplexed about how to proceed could consult the MoF website for guidance, or they could contact ESR filing companies for assistance such as Creative Zone Tax & Accounting.
- Filing: In the UAE, the ESR process is completed by filing the notification with the relevant authority. Using the MoF portal, notifications and Economic Substance Reports will be submitted, for which the firm must keep a perpetual record of substance use. The entity that is not covered by these rules and must prove sufficient economic substance in the UAE will undergo an assessment to ensure it can satisfy economic substance as per regulation.
- Reporting: The authority requires firms to outline and submit their UAE ESR report annually. Additionally, the firm should ensure that all the documents necessary are on hand, in case proof is required.
The best course of action is to always reach out to professional advisers before making any conclusions or assumptions. You may need to contact our ESR reporting professionals to guide and navigate you through your company’s circumstances and requirements if you are still uncertain about whether your business is required to submit an ESR notification or not. You can reach out to us at [email protected]