Strict compliance with ESR is vital for UAE firms to avoid fines, experts say

By Amirtha P S, Desk Reporter
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Companies in the UAE must follow and be up to date with the UAE’s economic substance regulations (ESR) if not they will have to incur heavy fines for their failure to adhere to the rules, experts stated.

The Dubai Chamber by collaborating with the leading corporate & commercial law firm Al Tamimi & Company had organized a webinar titled ‘Key Aspects of Economic Substance Regulations’ and it highlighted the latest developments and guided through the economic substance regime and compliance requirements. 

During the webinar, experts noted that the UAE has issued the Economic Substance Regulations (ESR) in April 2019 and followed them with updated guidance on relevant activities by the Ministry of Finance to help businesses to demonstrate economic presence in the UAE.

Later the UAE adopted a new ESR and as per these regulations company engaged in one of several specified sectors must have sufficient economic substance in the territory to access the tax regime. The changes were made due to pressure from the European Union (EU) on a number of territories, following recommendations from its EU Code of Conduct Group, and apply for financial years starting on or after January 1, 2019.

The key activities identified by the European Commission Code of Conduct Group are banking, insurance, fund management, financing and leasing, shipping, intellectual property, collective investment vehicles, and holding companies that generate income from any of these key activities.

Shiraz Khan, head of Taxation at Al Tamimi & Company, said that tax is an important revenue generation for many countries that don’t have immense natural resources. These countries generally rely on taxes to fund their public expenditure. During the 2008 downturn tax evasion was a major concern.

The UAE Ministry of Finance (MoF) in August 2020 announced the details of Cabinet Resolution No. (57) of 2020 concerning ESR. The Resolution was issued in consultation with the Organisation for Economic Cooperation and Development (OECD) and the European Union Code of Conduct Group, to guide firms that engage in one or more relevant activities. 

According to the resolution, the definition of a Licensee was amended to be limited to juridical persons and unincorporated partnerships that are registered (whether by way of commercial/trade license or other forms of permit) to conduct a Relevant Activity. Natural persons, sole proprietorships and other business forms that are not juridical entities are not under the scope of ESR.

The UAE MoF, in May 2020, issued a COVID-19 advisory extending the notification filing deadline and consideration of the impact of the pandemic on businesses. In January 2021, the MoF announced that the December 31, 2020 filing deadline for ESR notification and report was extended to January 31, 2021.

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