Economic Substance Regulations (ESR) is the initiative by the government of UAE in accordance with its international commitment to global trade regulatory body such as the Organization for Economic Co-operation and Development (OECD). ESR imposes a requirement for UAE entities including offshore companies and branches of local and foreign companies that carry out certain activities, to maintain adequate economic substance in UAE.
The objective of this regulation is to ensure that actual profits of entities are reported properly thereby preventing businesses from artificially shifting the profits to jurisdictions with lesser or no income tax to take advantage of the tax law.
It applies to entities that conduct relevant activities and generate income from these activities and are not exempt specifically are required to file the notification and report with the Ministry of Finance. ESR compliance requirements are to be fulfilled every year and they apply to companies, partnerships, and other business forms (Licensee) registered in the UAE, including a free zone and financial free zone that are engaged in any of the following relevant activity.
If applicable, entities should file a notification on the Ministry of Finance’s ESR portal within six months of the end of their financial year. The filing must include the disclosure of the relevant activities conducted, income statement, and the declaration whether the income was subject to tax outside of the UAE. A single consolidated notification can be submitted if the entity has multiple branches in the UAE.
Entities should file a report on the Ministry of Finance’s ESR portal within the twelve months of the end of the relevant FY disclosing:
ESR compliance has multiple components that are to be met at different levels. Non-adherence to the compliance and filing attracts severe penalties.
Failure to file notification: AED 20,000
Failure to file the report: AED 50,000, Deemed failure to meet ES Tests
Failure to provide accurate or complete information: AED 50,000, Deemed failure to meet ES Tests
Failure to meet ES tests: 1st year – AED 50,000 – Information exchange with foreign competent authorities
2nd year – AED 400,000, Information exchange with foreign competent authorities, Suspension, cancellation or non-renewal of trade license
BCL stays a reliable service provider in ESR regulation with proven expertise in local, national, and international compliance regulations and nullify the possibilities of legal risk to your organization!
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