ESR REPORTING
As part of the UAE’s commitment as a member of the OECD Framework and in response to an assessment of the UAE’s tax framework by the European Union (EU) Code of Conduct Group on Business Taxation, the UAE MoF issued a Cabinet Resolution on the Economic Substance (‘the Regulations’) on 30 April 2019 for which an Amended Resolution has recently been issued in August 2020 along with Updated Guidance. Economic Substance Regulations (ESR) states that every prescribed entity (‘Licensee’) that carries on Relevant Activities and derives an income from prescribed activities in the UAE are required to perform an Economic Substance Test. There are also certain exemptions prescribed.
If the Relevant UAE authorities determine that the Economic Substance Tests described above have not been met for a financial period, financial penalties could arise. Failure by an entity to comply with the Regulations shall result in penalties amounting from AED 10,000 to AED 400,000.
Economic Substance Test Declaration (filing a Report) must be submitted within 12 months from the end of their financial year (e.g. Report to be submitted by 31 December 2020 for entities with a financial year ending 31 December 2019). Further, Licensees also need to file a notification within 6 months of the close of its FY.
HEGAL Corporate Services has a diverse team of professionals across Tax, Finance, Law and Economics domains who review whether Economic Substance rules are applicable for your business and also clarify the extent to which they are applicable. Our team of experts can guide you through the measures that need to be taken to mitigate risks of non-compliance to ESR
Ways of Filing ESR Notifications and Report
The primary purpose of ESR is to establish, maintain and illustrate the presence of onshore and free zone companies which undertakes the respective Core Income Generating Activities with regard to meeting the Economic Substance Test.
ESR Notification Filing
In accordance with the Economic Substance Regulations, ESR filing UAE requires the Licensees and Exempted Licensees to file a Notification to their respective Regulatory Authorities for the relevant Financial Year in which the business carries the relevant Core Income Generating Activity. For ESR Notification Filing they are required to submit:
- The nature of respective Core Income Generating Activity being carried out by the Licensee or Exempted Licensee.
- The gross income of the Businesses is carried out under Core Income Generating Activity.
- The end date of the financial year of the Relevant Activity.
- The supporting documents are to provide additional evidence as required by the Regulatory Authorities.
Exempted Licensees are also compelled to file the ESR Notification and along with that, submit supporting documents in order to qualify their exemption.
Exempted Licensees that are tax residents in a jurisdiction outside the United Arab Emirates should submit the following documents:
- Businesses that are tax residents outside the UAE are required to issue a letter or a certificate which affirms their taxability in the foreign jurisdiction.
- An assessment of business tax, a business tax demand, proof of payment of the business tax, or any additional supporting document, issued by the business that is located in a foreign jurisdiction in which the business claims to be a tax tenant.
However, when a business is unable to provide adequate evidence in order to verify its exemption position, the Regulatory Authorities change the status of the business and repute them as a Licensee.
The time period for the submission of notification is different from that of an Economic Substance Report. The Ministry of Finance Portal is used for ESR Notification Filing which is done within the period of six months from the end of the relevant Financial Year. Also, the Licensees who have submitted an ESR Notification directly to their respective Regulatory Authorities should re-submit a Notification electronically on the Ministry of Finance Portal once available.
ESR Reporting UAE
Businesses are required to meet the requirements of the Economic Substance Test and file the ESR Report which entails the submission of information and documentation mentioned in the Economic Substance Regulations within the period of the relevant Financial Year. In accordance with the Ministerial Decision 57 of the year 2020, ESR Reporting should be done within twelve months from the end of the respective Financial Year.
After ESR Reporting, the National Assessing Authority issues its decision showing whether the Licensee has met the Economic Substance Test requirements within six years of the end of the relevant Financial Year.
For ESR Reporting UAE, companies that undertake the Relevant Activities are required to report;
- A relevant activity carried out by a business in the United Arab Emirates.
- Gross income of the business that is subjected to tax outside the United Arab Emirates.
- The date of the relevant financial year of the Licensee.
ESR Reporting UAE is to be submitted by the companies to the respective Regulatory Authority each respective financial year to show that they are carrying out the Relevant Activity. Under Economic Substance Regulations, it is compulsory to submit the details of the Relevant Activity, revenue, expenditures, and resources that show whether the Economic Substance Test of UAE is met.
Deadlines for Filing ESR Notifications and Report
- Licensees or Exempted Licensees that fail to submit their Notification along with the required supporting documents by the mentioned deadline will pay a penalty of AED 20,000 under Article 13 of Decision 57 for failure to provide a Notification.
- Licensees or Exempted Licensees that fail to re-submit their Notification by the mentioned deadline will pay a penalty of AED 20,000 under Article 13 of Decision 57 for failure to provide a Notification.
- Licensees or Exempted Licensees that fail to submit their Economic Substance Report by the mentioned deadline will pay a penalty of AED 50,000 under Article 14 of Decision 57 for failure to provide an Economic Substance Report.
