Economic Substance Regulations (ESR) in DMCC Free Zone
The companies in the UAE are now facing a new responsibility to comply with the Economic Substance Regulations (ESR) introduced by the UAE government to meet the global standards for combatting harmful tax practices. To comply with the ESR, the mainland, free zone, and offshore companies must demonstrate adequate economic substance in the relevant activities they conduct in the UAE. In line with this, the companies licensed by the DMCC have been asked to notify the free zone authority whether they are carrying out the relevant activity on or before 30th June 2020 for the reportable financial year 1.1.19 to 31.12.19.
Filing the ESR notification to the regulatory authority in the UAE is a mandatory requirement for all companies whether or not they come under the scope of ESR. The DMCC companies need to submit the ESR notification to the free zone authority within the deadline or else hefty penalties will be incurred.
How to Comply with Economic Substance Regulations in DMCC?
The companies across the UAE including the entities licensed by DMCC are required to ensure ESR compliance. To comply with ESR in DMCC, the companies should self-assess their substantial income-generating activities. The relevant activities as per the guidelines for ESR in the UAE are,
- Banking
- Insurance
- Investment & Fund Management
- Lease-Finance
- Headquarter Business
- Shipping
- Holding Company
- Intellectual Property
- Distribution & Service Centre
Economic Substance Notification in DMCC
As per the ESR guidelines issued by the UAE Ministry of Economy, the free zone companies are required to submit the ESR notification to the respective free zone authority. To comply with ESR in DMCC, the companies need to file and submit the notification to the DMCC authority. The ESR notification in DMCC needs to include the following information,
- A declaration that states whether or not the company is conducting the relevant activity
- A statement of whether any tax is levied outside the UAE on the income generated from the activity
- The financial year-end date
Economic Substance Test in DMCC
The companies that conduct the relevant activities within the UAE would undergo an assessment by the regulatory authority. The Economic Substance Test assesses whether the companies are,
- Directing and managing the business within the UAE
- Conducting Core Income Generating Activities within the UAE
- Retains adequate physical assets and expenditure in the UAE
- Have adequate full-time employees in the UAE
Economic Substance Reporting in DMCC
If a DMCC-licensed company is conducting relevant Activity in the UAE, it must then prepare and submit the ESR Report to the regulatory authority. The businesses must note that it is mandatory to submit the ESR report to the DMCC authority within 12 months of the financial year-end. The companies should include details of economic activity, income, expenses, and assets in the report. The companies that are part of a corporate group should submit the report separately as consolidated group reporting is not allowed. The process of Economic Substance Reporting in DMCC is done on an annual basis and therefore associating with a professional ESR service firm would ensure that the companies are complying with the regulation.
Penalties for Failing to File Economic Substance Notification in DMCC
The DMCC companies should be prepared to file the ESR notification on or before the deadline as the failure to comply with the regulations would attract hefty penalties. If a company fails to comply with the ESR notification requirement, a fine in the range of AED 10,000 to AED 5,000 will be imposed. Providing false or incomplete information will also attract a penalty in the same range.
How do Jitendra Chartered Accountants Help DMCC Companies Comply with UAE Economic Substance Regulations?
The Economic Substance Regulations were introduced in the UAE to ensure compliance with the standards set by OECD in regard to curbing Base Erosion and Profit Shifting (BEPS). As per the regulations, the companies in the mainland, free zone, and offshore are required to have adequate economic substance in the relevant activities they carry out. Since the failure to comply with the Economic Substance Regulations in the UAE would attract hefty fines, professional assistance is needed for all the documentation and assessments required as part of the process. Jitendra Chartered Accountants (JCA) is a reputed audit firm in Dubai that provides ESR services to the free zone, mainland, and offshore companies. JCA’s highly qualified Chartered Accountants help the clients in assessing whether they come under the scope of the Economic Substance Regulations in the UAE. JCA provides services including
- The Economic Substance Notification filing
- Preparing Economic Substance Report
- Provide recommendations if the companies fail to meet the Economic Substance Test