Essential ESR Notification Guide For Licensees & Exempted Licensees
Who has thought that businesses operating in the UAE will have to worry about the deadlines of filing the returns? Once upon a time the UAE popularly known as a tax haven has been introducing one after other laws to maintain the highest standards of transparency in line with international practices. Being an active member of the IMF, the UAE had introduced the VAT in 2018 to diversify the income and reduce the dependence on the depleting oil reserves. Now, the European Union and OECD have made it mandatory to implement UBO regulations, AML-CFT regulations and ESR regulations to avoid exploitation by the criminals, maintain transparency and lastly, to ensure fair business practices in the region while attracting foreign companies.
All the entities operating in the UAE mainland, offshore and free zones are now busy assessing their economic substance status as the deadline for submitting economic substance notification is looming. Entities categorised as Licensees and Exempted Licensees are required to submit the ESR Notification no later than 30th June 2021. The companies that carried out any Relevant Activity in the financial year ending 31st December 2020 must submit the ESR notification without fail to avoid the potential penalties imposed by the National Assessing Authority.
This article serves as a guide that will equip the entities that fall within the ESR to carry out their obligations. We will discuss here all the major tenets and nuances of filing an ESR notification in the UAE. Read on.
The Need to Carry Out a Self-Assessment
ESR notification is an annual requirement in the UAE and therefore the companies should carry out a self-assessment every year. Companies that submitted an ESR notification in the previous financial year should perform the assessment again to determine whether they carried out any Relevant Activity this year. Furthermore, entities that didn’t conduct any Relevant Activity in the previous financial year may have carried out activity this year. In that case, they should file an ESR notification before the current deadline.
Licensees & Exempted Licensees to File Notification
The Cabinet Decision No 57 of 2020 categorises the entities that fall within the ESR as Licensees and Exempted Licensees. Both Exempted Licensees, as well as Licensees, are required to file the ESR Notification. However, Exempted Licensees need not submit an ESR Report or meet the Economic Substance Test. An Exempted Licensee can be any of the following,
a) an Investment Fund
(b) a Licensee that is a tax resident in a jurisdiction other than the UAE
(c) a Licensee that is wholly owned by one or more residents in the UAE but is not part of an MNC
Group and carries out business only in the UAE
d) A Licensee that is a branch of a foreign entity, but its income is taxed outside the UAE
Information to be Stated in the Economic Substance Notification
As per Article 8 of the Cabinet Decision, Every Licensee and Exempted Licensee are required to include the following information in the Economic Substance Notification and submit it to the Regulatory Authority annually:
Relevant Activity carried out by the Licensee or Exempted Licensee during the Relevant Financial Year
Information on whether the Licensee or Exempted Licensee has generated Relevant Income during the Relevant Financial Year
The date of commencement and end of the Financial Year
Any other information or documents as may be requested by the Regulatory Authority
Exempted Licensees should submit all information and documentation evidencing its status as an Exempted Licensee
File Economic Substance Notification through MoF Portal
The Ministry of Finance (MoF) portal has been designed to serve as an efficient platform to submit the ESR notification, report and the required documents. ESR consultants in Dubai will help the companies easily navigate the complexities of filing ESR notification in the Portal. Companies are required to have an existing MoF corporate account to access the ESR Portal. The credentials that are recorded in the corporate account can be used to access the Portal for ESR filing purposes. Licensees and Exempted Licensees that are not registered as corporate users need to create a fresh account to file the ESR notification.
Penalties Related to Economic Substance Notification
Entities that fall within the scope of ESR in the UAE are required to meet all the relevant obligations. A Licensee or an Exempted Licensee that fails to meet its ESR Notification obligations will attract the following penalties:
A penalty of AED 20,000 for not submitting the ESR Notification.
A penalty of AED 50,000 on entities that provide inaccurate or false information
If an Exempted Licensee fails to provide evidence to substantiate its exempted status, the Authority will consider it as a Licensee. A Licensee is obliged to submit ESR Report, but such entities will fail to submit the report due to their exempted status. In this case, they will attract a penalty of AED 50,000 for not submitting the ESR Report. A penalty of AED 400,000 will apply if it is repeated in the subsequent year
File ESR Notification through Jitendra Chartered Accountants
Since ESR is fairly a new regulatory requirement in the UAE, entities commit mistakes while filing notification. The penalty amount for ESR non-compliance and errors are huge which will break the spine of such entities. Therefore, it is recommended to file ESR Notification through ESR consultants in Dubai such as Jitendra Chartered Accountants (JCA). We have even experienced that some companies do not properly assess their relevant activities by themselves and end up getting high amounts of penalties. We have served companies through appeal for cancelling their penalties with proper documentary justifications.
JCA has a team of auditors, lawyers, accountants and ESR experts who can guide the companies in performing assessments. JCA will assist the entities to file the ESR Notifications and Report without any errors through the MoF portal. Exempted licensees can consult with JCA to know what documents are required to substantiate their exempted status. Most importantly, JCA can advise the entities on the remedial actions to take if they fail the Economic Substance Test in the UAE.