The Economic Substance Regulations of the UAE were introduced in 2019 to ensure that businesses operating in the country have an adequate presence in the UAE. The objective of the regulations is to prevent businesses from shifting their activities to other jurisdictions that have a more advantageous tax regime. This is done to promote transparency and prevent profit shifting.
These regulations apply to Freezone, mainland and offshore companies. There are 9 relevant activities and depending on whether these activities were undertaken, or income was earned during the relevant period, companies have to file ESR notification and submit ESR reporting.
For companies whose financial year ended on 31st of December 2021, the deadline to file a notification is 30th of June 2022, and the deadline to file an economic substance report will be 31st of December 2022.
FTA has started imposing penalties on entities for non-compliance of ESR regulations. Federal Tax authority may impose the penalty anytime within six years from the date such violation was committed. If the company is persistently non-compliant, its license can be suspended, revoked, or not renewed.
Accurate assessment of the relevant activities is very crucial as incorrect assessments may lead to accumulation of penalties over number of years. It is highly advised to undertake such assessments on a yearly basis. Common mistakes we have come across are as follows:
- Self-assessment being done based on the activities mentioned on the trade license.
- Filing of wrong relevant activity due to lack of understanding of “Relevant Activity” as per ESR regulations.
- Ignoring ESR notification and ESR reporting by incorrectly assuming the entity qualifies as Exempt entity or is outside the of scope of ESR.
Additionally, Regulatory authorities are verifying these filings by requesting for copy of financial statements from entities who have not filed any notification or have filed notification claiming that the entity did not earn any Income.
How can Sovereign Help?
ESR applicability assessment:
- Detail study of your business activities to assess the applicability of Economic substance regulations on your activities.
- Providing support and guidance on filing notification with Ministry of Finance.
Economic Substance Regulations Test and compliance:
- Undertaking Economic Substance regulations impact assessment and gap analysis audit.
- Providing guidance and recommendations for compliance with the provisions of Economic Substance Regulations.
Final Reporting:
- Producing the final report for filing as per the requirements of Ministry of Finance.
- Assistance with filing of ESR report .
Bookkeeping:
- Recording of all business transactions as per IFRS accounting principles and producing monthly, quarterly, or yearly financial reports.
- Maintaining appropriate accounting records ensuring relevant activities and associated income are easily identifiable and presentable to authorities as and when required.
Contact the Sovereign experts today at accountingdxb@sovereigngroup.com to keep your company compliant with the Economic Substance Regulations.
