Economic Substance Regulation - ESR
Brief about ESR in the UAE
As part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the “Regulations”) on 30 April 2019. Guidance on the application of the Regulations was issued on 11 September 2019 (Ministerial Decision No. 215 of 2019), and Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies lists the Regulatory Authorities tasked with the administration and enforcement of the Regulations.
Recently on 10th of August, 2020, Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020, and updated Guidance was issued on 19 August 2020 (Ministerial Decision No. (100) of 2020. The Regulations require UAE onshore and free zone companies and certain other business forms that carry out any of the defined “Relevant Activities” listed below to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (“Economic Substance Test”).
- Banking Business
- Insurance Business
- Investment Fund management Business
- Lease - Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual property Business (“IP")
- Distribution and Service Centre Business
ESR Regulations apply to financial year commencing on or from 1st January 2019.
Latest update on ESR compliance
A. UAE Ministry of finance (MOF) has posted a circular on its website to provide information on the filing requirements and ESR deadlines as below:
- Entities undertaking relevant activities are required to submit ESR notification and Economic substance report, if applicable.
- The notifications and reports will need to be submitted online via MOF portal.
- MOF portal is expected to go live in first week of December 2020.
- As per law, ESR notification needs to be submitted within 6 months of end of financial year.
- Entities which had financial year end of 31st Dec 2019 and already submitted the notification earlier by the deadline of 30th June are required to re-submit the notification by no later than 31st Dec 2020.
- As per law, ESR report needs to be submitted within 12 months of end of financial year. Therefore, the deadline for filing ESR report for entities with financial year commencing on or after 1st Jan 2019 and ending on or before 31st Dec 2019 shall be 31st Dec 2020.
B. Templates for ESR notification and ESR report has also released by MOF on their Website.
Concerned Penalties
- Failure to submit ESR notification – Penalty of AED 20,000
- Failure to submit ESR report – Penalty of AED 50,000.
Actions to be taken for entities in UAE
- Assess the ESR classifications in light with the new regulations and evaluate whether entity will be required to file the notification.
- Submit/re-submit the notification on the MOF portal (once portal goes live) by deadline of 31st December 2020.
- To check, if the economic substance tests are met for the entity within the scope and make sure that the required information to be submitted as part of the ESR report are prepared on time.
- Submission of ESR report on or before 31st Dec 2020 for the financial year ended 31st Dec 2019
How we can help
- Perform an Impact assessment to assess whether any of the entity’s activity is within the scope of ESR in line with the new regulations.
- Assist the entity in determining applicability of any exemptions as per the changes in the new law.
- Assist the entity in determining the economic substance test requirements, which needs to be met.
- Assist in preparation and submission of ESR notification and report to Ministry of Finance.