ESR Assessment Dubai

Economic Substance Assessment in the Dubai, Abu Dhabi, Sharjah, UAE

Economic Substance Regulation in the Dubai is another set of compliance requirement to be followed by all business entities. The Economic Substance Regulations is in agreement with the global standard set by the Organization for Economic Co-operation and Development (OECD) on Harmful Tax Practices.So with an objective to curb harmful tax competition, on December 1, 1997, the European Union (EU) adopted a resolution on the code of conduct of business taxation. Code of conduct group on business (COCG) was established to assess the tax measures and regimes. In the past years, the world economy has experienced a shift of trade from land-based supplies to internet-based supplies which has produced a slight though complex looking ambiguity in the taxation methods to be followed for the online structures.

In order to formalize the governance schemes in such a scenario, the EU came with a set of economic substance regulations following certain criteria that are aligned with the International standards that other states can comply with them normally.

Economic Substance Regulation criteria:

  • Transparency under Economic Substance: The state jurisdictions must sign the OECD’s (The Organization of Economic Corporation and Development) multilateral convention and must comply with the international standards on the exchange of information, automatic or otherwise.
  • Fair tax practice under Economic Substance: Jurisdictions offshore structure practices to attract profit and avoid other activities that are not related to economic activity. Apart from this, they must also not have harmful tax regimes.
  • BEPS implementation: OECD’s Base Erosion and Profit Shifting must be implemented by the jurisdiction with minimum standards, starting with a country by country reporting.

So, the Organization of Economic Corporation and Development is a global forum wherein there are 36 government member states who work together along with 70 non-member economies. The major motive of this organization is to work towards the welfare of the global economy and ensure prosperity along with sustainable development. Working in a way that is environmentally friendly or more specifically employing methods of development that do not compromise with the needs of the future generations is the main aim of the Economic Substance Regulation policy. For assessing and monitoring the essential activities of the all member standards jurisdictions, a sub-body of this inclusive framework known as FHTP is made responsible.

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Why was Economic Substance Regulation introduced in the Dubai, Abu Dhabi, Sharjah, UAE?

One main reason and also the basic reason for the deployment of the Economic Substance Regulation into the United Arab Emirates was to keep a check on the harmful tax regimes and that the major corporations and government bodies are not harnessing the profit of surplus producing firms in an unethical manner. This economic substance assessment was also introduced to make sure that corporations are carrying out the real economic activities and are not indulging in just unethical profit gaining acts. DUBAI joined the OECD’s inclusive framework on the BEPS in May 2018. While joining OECD, DUBAI committed to introducing the required economic substance regulation by the end of the year 2018.

What is the purpose of the Economic Substance Regulation in Dubai, Abu Dhabi, Sharjah, UAE?

The purpose of economic substance assessment and regulation is to ensure that the DUBAI based entities that undertake certain activities are not indulged in any artificial means to attract or shift any kind of profits that are not just and proportionate to the relevance of their contribution to the economy of the United Arab Emirates. The Economic Substance Regulation assessment follows this strategy by confirming that the license is carrying out an activity in the DUBAI that achieves economic substance interest and the state is benefitted by its operations. Apart from this, harmful and unethical tax regimes are also checked by this economic substance assessment to ensure that the entities are not suppressed under any undue pressure.

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Who is subject to the Economic Substance Regulation assessment in Dubai, Abu Dhabi, Sharjah, UAE?

The Economic Substance regulation is subject to any of the DUBAI onshore companies or organizations along with free zone companies, branches, partnerships, including offshore companies and other DUBAI based business firms that carry out activities like:

  • Banking business
  • lease finance business
  • holding company business
  • intellectual property business
  • investment fund management business
  • headquarter business
  • insurance business
  • distribution and service center business

However, entities that are part of any multinational corporation are subjected to the economic substance assessment but also groups and companies that are based in the DUBAI and carry any relevant activity regardless of whether the entity belongs to a foreign multinational group or not.

Who is exempted from the Economic Substance Regulation assessment in Dubai, Abu Dhabi, Sharjah, UAE?

If a company is owned directly or indirectly by the government of the DUBAI (The DUBAI federal government or by any Emirate of the DUBAI) to the extent of 51% or above is exempted from the assessment and regulation of the Economic Substance.

What is the applicability of the Economic Substance Regulations in the Dubai, Abu Dhabi, Sharjah, UAE?

All licensee carrying the operations on the relevant activities in the United Arab Emirates, including the free zone and financial free zone are required to follow the economic substance rule which was released on April 30, 2019.

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How to meet the Economic Substance Regulations test in Dubai, Abu Dhabi, Sharjah, UAE?

The United Arab Emirates-based companies that are operating any relevant activities in any Emirate must satisfy the following Economic substance requirements and regulations-

  • The company’s core income-generating activities (CIGA) are operated or conducted in the DUBAI.
  • If the entity is directed and managed in the particular state in that activity.
  • If the company has an adequate number of qualified full-time employees for carrying out operations related to the firm’s business or if there is sufficient expenditure taking place for the outsourcing activities to the third parties in the DUBAI.
  • If the company has relevant physical assets or is able to attain minimum levels of expenditure on outsourcing to third parties in relation to CIGA in the United Arab Emirates.
  • If the company’s core income-generating activities (CIGA) are managed by some other senior entity, then it is checked whether the licensee has full control over and is able to monitor the activities of that particular entity.
  • If the company is able to manage the activities of its service provider for its outsourced CIGA.

What are the penalties for not complying with the Economic Substance Regulations in Dubai?

For failing to meet an economic substance regulation test a fine of about AED 50,000 be charged. If after an initial notice, the company fails to meet an economic substance test of a financial year a fine of up to AED 30,000 may be charged and further non-compliance will lead to non-renewal, suspension, or revocation of a license.

Why Choose Aviaan for Economic Substance Regulation Services in Dubai?

Our expert team and professional staff will facilitate you in economic substance regulation assessment in the most specialized way. Following are the benefits you will get for choosing Aviaan Accounting for Economic Substance Regulation Assessment Process:

  • Less Time and Money in Economic Substance Assessment: Aviaan Accounting has worked with government agencies for the introduction of economic substance regulation and has a lot of experience in this area, which means we would be able to help you get the work done in much less time than if you did it yourself and you would also end up saving money.
  • Planning of Economic Substance Test: A key aspect of providing economic substance assessment service is that we would try to understand your needs as well as situation to the best extent possible and then come up with a plan of action.
  • Smooth Process of Economic Substance: What Aviaan Accounting would ensure is that you would simply have to provide all the necessary documents, while we would handle the rest of the incorporation process.
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Our Services regarding Economic Substance Regulation in Dubai, Abu Dhabi, Sharjah, UAE

Aviaan Accounting can help you to go through the Economic Substance Regulation assessment without any major complexities and problems with guidance from our expert consultants:

  • Initial Check on Economic Substance Regulation: Doing a preliminary check on your business and relevant operations for the state of applicability of the test.
  • Core Assessment of Economic substance If you are within the scope of the economic substance regulations your firm passes the economic regulations test, then a core assessment will be done.
  • Highlighting non-compliance elements: We will help you identify any elements in your business that compel your company to not meet the applicability criteria for the economic substance regulations test.
  • Economic Substance Regulation Test: We will also help you to rectify and work on the elements and weak measures that will help you pass the economic substance regulation test.
  • Economic Substance Notification Filing: We will assist the licensee in the submission of the reports and filing of the notification, report, and returns to the relevant regulatory authority.

ESR Filing Deadlines

Financial Year End Notification Filling Deadline Report Filling Deadline
1 January 2019-31 December 2019 31 December 2020 31 December 2020
31 January  2020 31 December 2020 31 January  2021
29 February 2020 31 December 2020 28 February 2021
31 March 2020 31 December 2020 31 March 2021
30 April 2020 31 December 2020 30 April 2021
31 May 2020 31 December 2020 31 May 2021
30 June 2020 31 December 2020 30 June 2021
31 July 2020 31 January  2021 31 July 2021
31 August 2020 28 February 2021 31 August 2021
30 June 2020 31 March 2021 30 June 2021
31 October 2020 30 April 2021 31 October 2021
30 June 2020 31 May 2021 30 June 2021
31 December 2020 30 June 2021 31 December 2021

What are the penalties for non-compliance with Economic Substance Regulations in UAE?

The failure to meet the Economic Substance Test for the first time leads to a penalty of AED 10k to 50k, whereas AED 50k to 300k for the second consecutive failure. The notification failure leads to a fine of AED 10k to 50k.  The failure to provide accurate or complete information leads to a penalty of AED 10k to 50k. The demonstration failure of sufficient economic substance in Dubai for the first time leads to a fine of AED 10k to 50k, whereas AED 100k to 300k for the second consecutive failure.

What are the matters a Licensee should consider under ESR in UAE?

The matters to be taken into consideration by Licensee under ESR in UAE are the following list of non-exhaustive matters to appraise the relevant activities it has performed, the amount and type of income earned from them, and holding board meetings. The license should ensure board meeting minutes are signed and maintained in Dubai and demonstrate control and supervision over any outsourcing arrangements. The license should also recognize the amount and type of expenses and the number of Dubai-based full-time employees or other personnel and their qualifications.

The goal of filing an ESR Notification is to present the concerned Regulative Authorities with some basic information on the Licensee and its pursuits in the UAE. It is a requirement to file an Economic Substance return for the Reportable Period. While filing the Economic Substance notification in the UAE, the businesses need to show that whether or not they are carrying out the relevant activity in the UAE, whether the company’s earnings are subject to tax outside the UAE, and the date of the financial year-end.

Any questions and queries that you may have regarding ESR Assessment Dubai and its intricacies are welcome. get in touch with us. Our experts can certainly help you with the requirements. Contact us now at info@aviaanaccounting.com or +971502155301

ESR Services FAQS

Is the ESR return to be submitted by all UAE licensed entities?

Yes, all UAE licensed entities, whether carrying out relevant activities or not and whether making income or not, will have to present the ESR return.

What are the Relevant Activities?

The Relevant Activities are Banking, Insurance, Investment Fund Management, Lease-Finance, Headquarters, Shipping, Holding Company, Intellectual Property, and Distribution and Service Centre Businesses.

What is to be under the financial year-end/accounting reference period in the form?

Mention the company’s financial year as documented in your constitutional documents.

What is to be under reportable period for economic substance purposes in the form?

The UAE ESR regulations under Cabinet of Ministers Resolution no. 31 of 2019 require ESR return submissions from Financial Years commencing from 1 Jan 2019 onwards. Therefore, if a company’s Financial Year is from 1 Jan 2019 to 31 Dec 2019, the reporting period will be 1 Jan 2019 to 31 Dec 2019.

What are the penalties for non-compliance?

Failure to comply with the ESR (including giving wrong or deficient information) may result in a fine between AED 10,000 and AED 50,000 in any fiscal year. The penalty can increase to between AED 50,000 and AED 300,000 for the subsequent fiscal year.

Reference

  1. UAE Ministry of Finance – https://www.mof.gov.ae/en/strategicpartnerships/pages/esr.aspx
  2. Dubai International Financial Centre (DIFC) – https://www.difc.ae/business/operating/economic-substance-regulations/

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