WHAT IS ECONOMIC SUBSTANCE REGULATIONS (ESR)?

Regulations brought in the authorities to bring specific requirements for the entities incorporated in the UAE to demonstrate that the companies are carrying out the actual economic activity in the State and were not incorporated only to benefit from the privileged tax regime.

ESR IS APPLICABLE ON WHOM?

All the entities having a trade license/permit issued by any UAE Regulatory Authority i.e all the mainland and freezone companies.

ANY ENTITY HAVING EXEMPTION?

Any entity in which UAE government have a 51% or greater direct or indirect ownership.

Why are Economic Substance Regulations introduced in UAE?

The G20/ Organization for Economic Co-operation and Development (“OECD) has developed a 15 point action plan to address the issue of Base Erosion and Profit Shifting (BEPS) i.e. to address the concerns on tax avoidance, to ensure that the profits are taxed where the actual economic activities are conducted and also on value creation.

Out of the 15 specified, the Members of the OECD/G20 Inclusive Framework on BEPS has to comply with 4 minimum standards which are namely Action 5 i.e. Harmful tax practices, Action 6 i.e. Prevention of Tax treaty abuse, Action 13 i.e. Country-by-Country reporting & Action 14 i.e. Mutual Agreement procedure.

UAE being one of the members of the OECD/G20 Inclusive Framework also commits to implementing a minimum standard. In compliance to the framework, UAE has issued the following regulations:

• Cabinet of Ministers Resolution No.31 of 2019 concerning Economic Substance Regulation (which is Action 5 of BEPS);
• Followed by Ministerial decision No. 215 for the year 2019; and
• Cabinet of Ministers Resolution No.32 of 2019 concerning Regulation of the Submission of reports by Multi-National Companies (Action 13 of BEPS).

What is required to be done?

• Analyzing the businesses activities in order to determine whether the business falls any of the relevant activities specified by ESR
• File a negative notification within the above specified due date in case the business does not falls under any of the relevant activities
• File positive notification with authority within the due date in case the business falls under any of the specified relevant activities and demonstrate the economic substance of these relevant activities in a detailed report to be filed by December 30, 2010

What are the penalties in case of non-compliance or on furnishing inaccurate information?

• First year of failure-AED 10,000-AED 50,000
• Second Consecutive year of failure- AED 50,000-AED 300,000.
• Failure to provide accurate information-AED 10,000-AED 50,000
• Commercial license can be suspended, de-registered or not renewed in future.

WHAT IS THE DUE DATE FOR FY 19?

How we can help

• Analyze and conduct an impact assessment of the businesses activities in order to determine whether the business falls under the purview of ESR in the UAE
• Filing annual positive/negative notification with the authorities based on the specified analysis
• Filing annual positive/negative notification with the authorities based on the specified analysis

Why is a professional help required?

• The relevant activities specified by the authorities are to be determined in true form by analyzing the actual conduct of activities and not merely by looking at the financial statements/ trade license of the Entity. A professional will examine all the activities of the entity and will be able to provide a clear and true picture.
• Even in cases, where the Entity prime facie appears not be falling in any of the specified activities, a thorough analysis of the business activities may reveal a different picture.
• In order to save on the penalties in case of inaccurate filing, a professional help may be beneficial.
• Even in the cases, where the entities are not falling under any of the specified activities, a professional opinion backed by supporting documentation shall be helpful in case of any audits done the authorities.

RELEVANT ACTIVITIES