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Economic Substance Regulations (ESR) in DAFZA Free Zone

The UAE has always made commendable efforts in streamlining its economy in line with the global standards by curbing illicit financial practices. The implementation of AML CFT regulations and now the Economic Substance Regulations (ESR) are the prime examples of the regulations enacted by the UAE to comply with the global standards. With the enactment of the ESR, the companies that conduct relevant economic activities within the UAE are tasked with the responsibility of demonstrating the economic substance.

The mainland, offshore, and free zone companies including the DAFZA-licensed companies are required to comply with the ESR in UAE. To comply with the ESR in UAE, the DAFZA authority had announced the due date for filing the ESR notification as on 31 May 2020 with the reportable financial year 1st January 2019 to 31st December 2019. To ensure ESR compliance in UAE, the DAFZA companies need to consult the best ESR services in Dubai for professional assistance.

Economic Substance Regulations in DAFZA: A Quick Glance at the Relevant Activities

Right after the announcement of the ESR requirement in UAE, the companies have been grappling with having better clarity over the relevant activities. The companies in DAFZA need to self-assess whether they are carrying out the relevant activities in the UAE. It is recommended to conduct the assessment on relevant activities with the guidance of best ESR services in Dubai, UAE. The following are the relevant activities as per the Economic Substance Regulations in the UAE.

  1. Banking Business
  2. Insurance
  3. Lease-Finance Activity
  4. Investment & Fund Management
  5. Headquarters Activity
  6. Shipping
  7. Holding Company
  8. Intellectual Property Business
  9. Distribution & Business Centre

For details on relevant activities, read this.

Economic Substance Regulations in DAFZA: Filing Annual ESR Notification

The companies in the UAE irrespective of the scope of ESR are required to notify the concerned regulatory authority whether they are carrying out the relevant activity within the UAE or not. The notification should be filed and submitted to the authority on an annual basis. The companies licensed by the DAFZA need to submit the notification to the free zone authority as per the ESR guidelines. The DAFZA companies need to,

  • Assess and notify whether they are carrying out any substantial economic activity
  • Disclose if the income generated from the relevant activity is taxed outside the UAE
  • Date of financial year-end date

Also read: UAE Economic Substance Notification Deadline for Free Zones & Mainland Companies

Economic Substance Regulations in DAFZA: A Glance at Economic Substance Test

The DAFZA companies that conduct the relevant activity in the UAE need to demonstrate adequate economic substance in substantial activities. The economic substance test in the UAE will assess whether the companies are

  • Conducting the Core Income Generating Activity (CIGA) in the UAE
  • Being directed and managed in the UAE
  • Have an adequate level of employees, operational expenditure physical assets in the UAE to carry out the CIGA

Since the businesses vary in size and nature, the UAE takes into account the nature of the activity and the level of income earned by the licensee to determine the adequate economic substance. Therefore, the ESR guidance has not set a minimum standard for adequate or appropriate economic substance.

Also read: ESR Compliance: 5 Requirements for the UAE Economic Substance Test

Economic Substance Regulations in DAFZA: Filing Annual Economic Substance Report

The companies licensed by the DAFZA need to file an annual Economic Substance Report to the free zone authority within 12 months of the financial year-end. While compiling the Economic Substance Report details like economic activity, income, expenses, and assets. The regulations don’t allow consolidated group reporting and the companies that are part of a corporate group need to file the report separately.

What Happens if a DAFZA Company Fails to Comply with Economic Substance Regulations in UAE?

Failing to comply with ESR in the UAE would attract hefty penalties and severe legal consequences for the company. If a company fails to file and present the annual ESR notification, a fine of AED 10,000-50,000 will be imposed. The companies that furnish incorrect or incomplete information would incur the same amount of penalty.

Why Choose Jitendra Chartered Accountants?

The companies in the UAE, including the firms in DAFZA, have been mandated to comply with the ESR in a bid to make sure they are not taking advantage of harmful tax practices. The ESR compliance process is executed through three stages: ESR Notification, ESR Test, and ESR Report. The filing of notification and reporting needs careful attention as errors may get the companies penalized. To avoid such unforeseen events, the companies need to associate with the firms that provide ESR services in the UAE. Jitendra Chartered Accountants (JCA) provides efficient and reliable ESR services in Dubai, UAE. JCA assist the companies in

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