ESR Deadline on September 30: What Should Business Owners Do Now?
It’s time for companies operating in the UAE to determine their Economic Substance Regulation (ESR) obligations. Companies that conducted relevant activities with 31st March 2021 as the financial year-end must submit ESR notification no later than 30th September 2021. On the same line, companies that drew relevant income from the relevant activities with 30th September 2020 as the financial year-end must submit the ESR report before 30thSeptember 2021.
Failing to comply with these requirements will attract hefty penalties. However, the companies can consult with ESR consultants in the UAE for the assessment, which will save them from the fines. This article discusses the ESR obligations of companies and what they must do to avoid penalties. Read ahead for valuable insights.
Start with Self-Assessment
Conduct a self-assessment to determine if your company has carried out any of the Relevant Activities in the relevant financial year. The nine Relevant Activities are Banking, Insurance, Lease-Finance business, Investment Fund Management business, Holding Company business, Headquarters business, Shipping business, Intellectual Property (IP) business and Distribution & Service Centre business. If the company has carried out any of the activities, it must file the ESR Notification before the deadline.
Determination of Hidden Relevant Activities
The companies should look beyond the activities in their trade license to determine whether they are a Licensee under the ESR. For instance, ABC LLC carries out trading business in the UAE as per its trade license. However, upon an assessment, it is determined that the company earns interest from its foreign group entities. This means ABC LLC carries out the Relevant Activity of Lease-Finance business and must file ESR notification. Normally, most companies do not conduct such in-depth assessments and attract penalties for non-compliance. Seeking help from ESR consultants in Dubai will help them avoid the penalties.
Determine if you are a Licensee or Exempted Licensee
The Cabinet Decision No 57 of 2020 classifies the companies that fall within the scope of ESR as both Licensees and Exempted Licensees. The licensees must submit both ESR notification and the ESR Report, while the exempted licensees are required to file for only the ESR Notification. However, the exempted licensees need to submit evidence that substantiates their exempted status.
An exempted licensee can be,
a) an investment fund
b) Entities that are tax residents outside the UAE
c) A company wholly owned by one or more residents in the UAE given its not part of an MNC group and conducts business only in the UAE
d) Foreign company branches whose Relevant Income is taxed outside the UAE
Consequences of not Substantiating Exempted Status
Any company that does not submit evidence to substantiate its exempted status will be considered as a Licensee, required to submit the ESR report. In this case, the companies that fail to submit the exempted status evidence will incur a penalty of AED 50,000 for not submitting the ESR Report. They will also incur a penalty of AED 400,000 if the violation is repeated in the subsequent year. ESR consultants in the UAE can help you substantiate your exempted licensee status.
How to Prepare an Economic Substance Notification in the UAE?
As per Article 8 of the Cabinet Decision, both the licensees & exempted licensees must state the following information in the ESR notification:
- Relevant Activity conducted during the Financial Year
- State whether at Relevant Income has been earned during the Relevant Financial Year
- The dates on which the Financial Year starts and ends
- Any other information/documents requested by the Regulatory Authority
- Evidence to substantiate exempted status (only for exempted licensees)
How can Jitendra Chartered Accountants Help You?
Filing ESR notifications and ESR reports is an annual requirement, which calls for the need to conduct the assessments every year. Wrong assessments, faulty notifications/reports may lead to hefty penalties leading to reputation damage. An efficient and cost-effective way to avoid ESR penalties is by enlisting the help of the best ESR consultants in the UAE.
Jitendra Chartered Accountants (JCA) provides the best ESR compliance services in the UAE for companies that fall under the obligation. JCA can help the companies properly assess their ESR applicability and file annual notifications and reports. JCA can also help you assess whether your company can meet the ESR test or not. If you are not able to meet the Economic Substance Test JCA can provide remedial actions. In case if you incur any ESR penalties in the UAE, JCA can save you by providing ESR appeal services.