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Administrative Penalties for ESR Non-compliance in the UAE

The Cabinet Resolution no. 57 of 2020 has given the administrative penalties related to various violations related to Economic Substance Regulation (ESR). The new resolution has increased the number of penalties for violations committed by both Licensees and Exempted Licensees. The major violations are providing inaccurate information, failing to submit ESR notification & ESR Report and failing to meet the Economic Substance Test in the UAE.

The penalty amount is a reminder for businesses to consult with expert ESR consultants in the UAE before submitting notifications and ESR Reports. Here is a list of ESR administrative penalties that businesses should be wary of:

Offences and Penalties for failure to provide a Notification

A Licensee or exempted licensee that fails to submit an ESR notification in the UAE is liable to pay an administrative penalty of AED 20,000 as per Article 13 of Cabinet Resolution no. 57 of 2020 concerning economic substance requirements. Once the National Assessing Authority determines that the entity has committed the offence, it will send a notification regarding the penalty.

Penalties for failure to submit an Economic Substance Report

An administrative penalty of AED 50,000 as per Article 14 of Cabinet Resolution no. 57 of 2020 will be imposed on entities that fail to submit the Economic Substance Report and any relevant information or documentation required to be submitted in accordance with the provisions of the Cabinet Resolution No 57 of 2020 concerning Economic Substance Requirements.

If the business commits the same violation in the Financial Year immediately following the Financial Year in which this offence was previously committed, an administrative penalty of AED 400,000 as per Article 14 of Cabinet Resolution no. 57 of 2020 will be imposed. Since the repetition of the violations attracts more monetary loss in the form of penalties, it is better to seek the advice of the best ESR consultants in Dubai.

Penalties for Failing to Meet Economic Substance Test

Businesses that carry out a Relevant Activity are required to meet the Economic Substance Test in the UAE. However, the failure to meet the Economic Substance Test for each financial year will attract a penalty of AED 50,000 as per Article 14 of Cabinet Resolution no. 57 of 2020 for the first year. However,  a repetition of the same violation in the subsequent Financial Year will attract an administrative penalty of AED 400,000 as per Article 14 of Cabinet Resolution no. 57 of 2020.

Administrative Penalty for Filing Inaccurate Information

Both the Licensees and exempted licensees should take care to provide accurate information and proper documents to the Regulatory Authority. A penalty of AED 50,000 as per Article 15 of Cabinet Resolution no. 57 of 2020 will be slapped on the entities that file inaccurate information and fail to inform about the error while knowing about it. The National Assessing Authority will send a notification to the entities about the penalty upon discovering the violation.

Contents of the Penalty Notification

Once the National Assessing Authority determines a Licensee or Exempted Licensee has committed an ESR violation, a notice will be sent to the violators. The Authority will inform the violators of the following things:

  1. The National Assessing Authority has determined that the Licensee or the Exempted Licensee has committed the violation in the relevant financial year
  2. The reasons for imposing the ESR administrative penalty
  3. The amount of administrative penalty imposed on the entity
  4. The date from which the administrative penalty is due ( not less than 30 business days after the issue of notice)

Right to Appeal Against the Administrative Penalty

As per Article 17 of the Cabinet Resolution 57 of 2020, a Licensee or an Exempted Licensee is allowed to appeal against the administrative penalty imposed by the National Assessing Authority. The appeal can be made on the following grounds:

  1. The entity has not committed the violation
  2. The penalty imposed is not proportionate to the violation
  3. The penalty imposed by the Authority exceeds the limit prescribed in the Resolution

The National Assessing Authority will issue a resolution that details the procedure for appealing against ESR penalties in the UAE. The resolution will contain the mechanism for filing the appeal and other procedures related to the review of the penalty and decision in relation to the appeal.

How Can Jitendra Chartered Accountants Help you Avoid ESR Penalties?

Businesses that are classified as Licensees and Exempted Licensees should be wary of the hefty ESR administrative penalties in the UAE. Failing to issue ESR notification, ESR report, failure to meet Economic Substance Test and filing inaccurate information are the major violations that attract penalties under ESR in the UAE. Given the severity of the penalties, businesses should try to avoid the penalties in the first place rather than go for an appeal after incurring it. Consulting with the best ESR consultants in the UAE such as Jitendra Chartered Accountants (JCA) is the best alternative for avoiding penalties.

JCA has highly qualified auditors and business setup consultants who possess sound knowledge of the ESR rules. JCA assists the companies in complying with the UAE ESR requirements and helps them avoid fines and other actions. JCA help the companies by assessing whether they can meet the UAE Economic Substance Test, providing recommendation if the companies fail to meet the ESR test and helping them file the annual ESR Notification and ES Report without any error.

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