Established in 2019, the Economic Substance Regulations (ESR) requires UAE entities to maintain sufficient economic presence in the country concerning the businesses undertaken. Implemented as a result of European Commission concerns, the ESR mandates that UAE entities, including all companies with geographically mobile activities, submit an annual report to the Ministry of Finance.
Accordingly, the entities need to examine whether any professional activities fall under the criteria specified by ESR. If so, the businesses need to assess which activities fall within the scope of the economic substance regulations and ensure they meet the economic substance requirements for each Relevant Activity.
Being a quantitative and qualitative assessment at the same time, the procedure takes operational, financial, tax/transfer pricing, legal, and governance matters into consideration. Meeting the annual filing requirements is a must to avoid penalties for non-compliance.
Just like the Cayman Islands and Bermuda, UAE also set up economic substance legislation to prevent multinational businesses and other entities from artificially moving profits to jurisdictions with little to no income tax. When a shift happens without substantial activities in said jurisdiction, the entities take advantage of the jurisdiction’s tax laws and make way for various malpractices.
Being a ‘no or nominal tax’ jurisdiction, the ESR affirms the UAE’s commitment to addressing concerns about mobile business activities without corresponding local economic activities. The importance of the proper legislation led to the UAE Cabinet Resolution No. 31 of 2019 concerning Economic Substance Regulations.
When it comes to meeting economic substance requirements, the entities that partake in the Relevant Activities have to file their financial information. The activities include banking, shipping, insurance, holding company, investment fund management, intellectual property, lease finance, distributions and service centre, and headquarters of organisations.
Determining whether an entity is carrying out any of the Relevant Activities is essential. Approaching businesses with a ‘substance over form’ attitude can help in this assessment. No matter which Relevant Activity an entity is engaged in, there is no minimum income threshold to meet the economic substance regulations Dubai.
However, some entities are exempt from maintaining economic substances in the country even if they carry out the specified Relevant Activities. To make an exemption claim, the entity must file a notification and produce relevant documents supporting the claim. The exemption applies to:
- Businesses owned by UAE nationals operating in the country alone that do not have any affiliations with multinational corporations
- Entities that are tax residents outside of the UAE
- Branches established by foreign entities that are subject to tax in the home jurisdiction
- Investment funds
If the competent authorities reject the exemption claim, the entity must meet the economic substance requirements. Then, they must file a notification and the necessary reports.
Spectrum is an auditing and accounting firm that can guide your business through everything related to Economic Substance Requirements in Dubai. Spectrum can aid in assessing whether your business is conducting any Relevant activities as per Economic Substance Regulations (ESR) act or not, assist in filing the ESR Notification, Checking whether the sufficient documentation is maintained as ESR requirement if you are conducting any ESR relevant activity help in filing the Economic Substance Report on Ministry of Finance. Visit our ESR blog or the Ministry of Finance website to find out more about related services and procedures.
What happens when an entity undertakes more than one Relevant Activity?
When an entity has more than one Relevant Activity under its care, it must meet the financial requirements for both activities.
When should an entity report to the Ministry of Finance?
One should submit the ESR notification within 6 months from the end of the financial year and submit the ESR report within 12 months from the end of the financial year.
What happens when you fail to file economic substance reports?
Failure to meet the economic presence obligations means that the entity must pay administrative penalties starting from AED 20,000 to AED 400,000 based on the type of non-compliance. There is a six-year limitation period on filing economic substance reports. Other penalties are enforced by suspending, revoking, or not renewing the UAE entity’s trade license.