ESR UAE
UAE Economic Substance Regulations
Economic Substance Regulations In UAE ( ESR UAE )
The UAE cabinet has promulgated resolution no. 31/2019 detailing the subject resolution. The UAE has issued Economic Substance Regulations as part of the nations’ involvement as a member of the OECD Inclusive Framework and with regards to an evaluation of the country’s tax framework by the European Union Code of Conduct Group on Business Taxation. UAE Economic Substance Regulations will apply to certain types of business activities, including banking, insurance, and shipping, undertaken in Freezone and Mainland jurisdiction.
The European Union observations regarding tax evasion, improper tax practices, and tax avoidance using illegal means have led to the necessity for such a regulation. The designated committee in the European Union has examined the tax framework in the country and directed adequate enhancements. UAE, being a member of the Organization for Economic Co-operation and Development (OECD), has accepted the suggestions and prepared ESR accordingly.
The all-encompassing regulation will aid the authority in stringent monitoring of taxes. Thereby, ensuring that tax evasions and tax avoidance are reduced to a remarkable extent. The federal government in the country has introduced amendments in 2020, to improve the efficacy of the regulation. UAE cabinet resolution no. 57/2020 in respect of Economic Substance Regulations is in force presently. The amended version envisages better monitoring of activities by the relevant entities by the authorities. Besides ease of filing of taxes by those companies.
Economic Substance Test in UAE
A licensee must abide by the regulations laid down in the latest, amended, version of ESR. Failure in pursuing with the stipulated norms can invite penalties or cancellation of license and will affect the credibility of the firm. Therefore, the organizations must make sure that the requirements as in UAE Economic Substance Regulations are to focus devotedly to continue business services in UAE without facing any unpleasant legal actions.
The organizations directly under the government and governmental bodies are immune to subject regulations. Rest all business entities must furnish the economic activities in the predefined time intervals, i.e. each quarter, end of fiscal, or as prescribed by the authority. The penalty for non-compliance with ESR will vary from AED 10,000 to 50,000.
Charges for ESR
Regarding fees for ESR, Dubai, and UAE companies have regulations that must be followed. Companies must keep their records up-to-date with the latest updates from the government’s labor department or face hefty fines. Each company is responsible for staying abreast of all new changes to these regulations and making sure they are compliant by updating their employee registration record accordingly.
For those seeking assistance understanding ESR charges, plenty of resources are available to get help with questions or concerns about current regulations regarding employment within Dubai and UAE companies.
UAE entities that conduct any one or more of the Relevant Activities must file a notification within six months of the end of the financial year (FY) on the Ministry of Finance’s (MoF) online ESR portal. As part of this filing, entities must disclose which relevant activities were conducted, whether any income was earned therefrom and whether such income was subject to tax outside the UAE. In the case of a UAE entity with multiple UAE branches, only one consolidated notification is to be submitted
Economic Substance Tests UAE entities that have earned income from any Relevant Activity(ies) must demonstrate adequate substance in the UAE relating to such activity(ies) by satisfying the following three Economic Substance Tests (ES Tests): – Core Income Generating Activity (CIGA) test requiring the core activities to be performed in the UAE – Directed and Managed test requiring the business to be directed and managed from the UAE in relation to the Relevant Activity(ies); and – ‘Adequacy’ test requiring adequate resources (employees, expenses and assets) in the UAE Holding companies are subject to reduced ES Tests whereas, High risk Intellectual Property businesses are subject to enhanced ES Tests. In determining whether an entity has adequate economic substance in the UAE, authorities are expected to consider the impact of Covid-19 (e.g. travel restrictions, which do not allow directors to travel to the UAE for board meetings) based on a notification issued by the MoF. However, the facts in each case should be carefully reviewed by businesses and documented along with considerations regarding the appointment of alternative directors.
UAE entities will need to assess whether and which of their activities fall within the scope of the economic substance regulations, and how to ensure they meet the economic substance requirements in respect of each Relevant Activity. This is both a qualitative and quantitative assessment that would involve consideration of operational, financial, tax / transfer pricing, legal and governance matters.
AHG-Dubai is ready to embrace the new opportunities and challenges presented by the new corporate tax law to help guide our clients’ businesses through the new phase.
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