The United Arab Emirates introduced Economic Substance Regulations in April 2019, in alignment with international standards set by the Organization for Economic Co-operation and Development (OECD) and the European Union. The primary goal of these regulations was to prevent harmful tax practices and to ensure that companies conduct certain types of “Relevant Activities” within the UAE, such as banking, insurance, leasing, fund management, shipping, intellectual property, and holding company activities. Contact top Economic Substance Regulations experts for detail.
Understanding ESR Assessment
The Federal Tax Authority is appointed as the National Assessing Authority to carry out ESR assessments to determine whether a Licensee or an Exempted Licensee comply with the Economic Substance Test for a given financial year, in accordance with Article 7 of Cabinet Resolution No. 57 of 2020. For a comprehensive review of the business’s activities and compliance, the National Assessing Authority conducts the ESR assessment up to six years after the end of a reportable year. However, specific factors like gross negligence, fraud, or misinterpretation could extend this timeframe. High-Risk IP Licensees might require careful assessment to make an informed decision. After a comprehensive evaluation, the National Assessing Authority indicates whether the business has met the economic substance test or not.
Process of Filing an ESR Assessment in the UAE
Step 1: Identify Your Business Activities
The first step to file an ESR assessment in the UAE is to have a comprehensive understanding of the Economic Substance Regulations. By doing so the companies will be able to identify whether their business activities are classified as “Relevant Activities” as per Economic Substance Regulations’ guidelines. These relevant activities mainly comprise banking, Lease-Finance, shipping, Intellectual Property (IP) and holding company businesses. This requirement ensures that businesses operating within the UAE engage in substantial economic activities that reflect their presence in the country.
Step 2: Assess Economic Substance
Once the company has identified their relevant activities and their associated core income generating activities (CIGAs), it’s important to assess whether the company’s operations are compliant with the Economic Substance Regulations for those activities.
Step 3: Maintain Records
In order to streamline the reporting process, it is essential for the company to collect all necessary documents of business activities, financial records, premises-related information and the number of employees in the UAE.
Step 4: Prepare the ESR Notification and Report
The ESR notification and report are a critical requirement for filing an ESR assessment in the UAE. The ESR notification provides an overview of the business’s activities, while the ESR report gives in-depth information about its economic substance compliance. The company should ensure that the information provided is accurate and complete, as it will be submitted to the relevant regulatory authorities.
Step 5: Submission of ESR Notification and Report:
The UAE Ministry of Finance has established an online portal for the submission of ESR Notification and Report. Every licensee and exempted licensee must submit an ESR notification precisely six months before the end of the business’s financial year. Moreover, licensees are supposed to submit the ESR report before twelve months of the end of the business’s financial year.
Step 6: Evaluation and Penalties
After submitting your ESR notification and report, the regulatory authorities will evaluate the company’s compliance with the Economic Substance Regulations. The National Assessing Authority evaluates all the information given by the company to decide whether the business has met the economic substance test or not. Administrative penalties might be imposed by the government, if the company is found to be non-compliant to the Economic Substance Regulations.
Step 7: Ongoing Compliance
Economic Substance Regulations require the company to maintain economic substance in the UAE consistently. In case of changes in business activities, the company should review and update their ESR report to show compliance.
Requirements to Successfully Pass ESR Assessment:
- In order to reinforce the country’s economic substance, licensees engaged in relevant activities and CIGAs must ensure presence in the UAE in terms of physical assets, employees, and business activities.
- Active management practices, such as conducting regular board meetings with physically present directors in the UAE, contribute to business enhancement. Meeting minutes must be recorded, signed, and retained within the UAE.
- Licensees engaging in relevant activities must employ an appropriate number of employees, whether permanent or temporary, with a physical presence in the UAE.
- The assessment can be performed even if a licensee has not earned any relevant income in a reportable period. However, certain licensees may not be required to meet the ESR test in this case.
- Licensees that have been proven exempt for a relevant financial year do not undergo the assessment process to meet the ESR test. The only obligation for an exempted licensee is to file a notification and provide evidence of their exempted status. Failure to provide adequate evidence could result in an assessment failure.
