Economic Substance Regulations: Are you Prepared for the Updated Rules & Deadlines?
As the UAE is inching towards its goal of attaining economic transparency, investors need to be prepared enough to comply with the regulations. This is especially true in the case of Economic Substance Regulations (ESR) in the UAE as the new updates and renewed submission deadlines have forced the businesses to reassess their ESR applicability. This poses the decisive question: ‘Is your company prepared for the ESR?’ To give yourself a reassuring answer to this question, ensure you are aware of the following requirements:
1. Check the Extended Deadline for Report Filing
The UAE Cabinet of Ministers on August 2020 issued Resolution No 57/2020 which amended and repealed Resolution No. 31/2019, Cabinet Ministers Resolution No. 58/2019, and Cabinet Ministers Resolution No. 7/2020. As per the new Resolution and the guidance issued through Ministerial Decision No. 100/2020, the entities that come under the scope of ESR must file the report on or before 31st of January 2021.
2. Contents of the ESR notification/ Report Amended
In a departure from the previous law, the new resolution requires the licensees carrying out a relevant activity to state the jurisdiction of the Parent Company, Ultimate Parent Company, and Ultimate Beneficial Owner who claim to be tax resident. The licensees that are required to file the ESR Report must submit a copy of financial statements.
3. Requirements for Refiling of ESR Notifications
The licensees must file the ESR notification within six months from the financial year-end. Those who have filed the ESR notification prior to the amendments in the UAE ESR Law should re-submit the modification to the relevant regulatory authority. This means, all the notifications for the financial year ended 31 December 2019, will have to be re-submitted.
4. Understand the Role of the FTA
As per the new regulations, the Federal Tax Authority (FTA) dons the role of the National Assessing Authority. The FTA is responsible for assessing and enforcing compliance with the Economic Substance Test. Relevant Regulatory Authorities including the DED, free zone authorities (such as DMCC, DIFC, JAFZA etc.) will be responsible for collecting and checking the accuracy of notifications and reports submitted by the licensees.
5. New Online Portal for Filing Purpose
From now on, the filing of the ESR notifications, economic substance reports and the submission of any other relevant documents should be done through the dedicated portal to be launched by the Ministry of Finance (MoF). The Information on the Portal, including the rules and procedures for use of the portal, will be published on the MoF’s website.
6. Check if you are an Exempted Licensee
Earlier the exemption from ESR had been granted only to the UAE companies with 51% or more direct/indirect government ownership. However, under the amended ESR, the following categories of licensees will be exempt:
- Investment funds, including the UAE entities used by the fund to make or hold investments, however, the exemption does not apply to the entities in which the fund ultimately invests;
- UAE branches of foreign companies, on the condition that the foreign company be subject to tax in its jurisdiction of incorporation;
- Licensees that are tax resident outside UAE;
- UAE resident-owned businesses, which are not part of a multinational group; and
- Any licensee for which the Minister of Finance issues a decision to grant it a capacity of an ‘exempt licensee’.
The exempted licensees also need to file annual ESR notification to the regulatory authority. Sufficient documentary evidence should be submitted along with the notification to take full benefit of the exemption.
7. Compliance during liquidation
Licensees conducting relevant activities will need to meet ESR compliance requirements even during liquidation, up to the time their license is struck off the corporate registries. Consult with the best ESR consultants in Dubai, UAE who will guide you in complying with the updated regulations.
8. Be Wary of the New Penalties
The new regulation has revised the penalties levied upon the entities violating the ESR norms. The major ESR penalties are the following:
- AED 50,000 for failure to submit reports or failure to meet the requirements ESR test in the first year.
- AED 400,000 for failure to submit reports or failure to meet the requirements of the tests in the second year.
- AED 50,000 for furnishing inaccurate information to the RA or FTA
- AED 20,000 for failure to submit annual ESR notification
- License cancellation for repeated non-compliance
Hire the Best ESR Consultants in Dubai, UAE
The revised ESR has been a welcome change for the businesses in the UAE as it provides more clarity on the scope and application of the regulation. However, in light of the updated UAE ESR laws, the licensees need to take immediate action. To reassess their previous ESR filings, the companies need the assistance of the best ESR consultants in Dubai such as Jitendra Chartered Accountants (JCA). JCA helps the companies in reassessing their original ESR classifications and determine whether they fall within the purview of the revised regulations or not. JCA’s reassessment would help the companies to prepare for resulting compliance requirements accordingly.