How to file ESR in UAE? Do you need to file ESR?
ESR or Economic Substance Regulation is one of the hottest topics in the business world of the UAE, as it was implemented on 1st January 2019. Though good time has passed, inconsistencies in the filing of initial notification and different approaches for different authorities drive firms and businesses into a dilemma. Thus the requirement of guidance from someone who has ladles full of experience and monitors announcements/clarifications in the domain of ESR is required by the firms. If the firms/ businesses fail to comply with the ESR rules and regulations they are liable to face penalty and risk suspension of their business.
What is ESR Notification?
Due to this major transformation in the business landscape of the UAE to introduce global level compliance, mainland, free zone and the offshore companies in the UAE have to provide economic substance in listed relevant activities conducted in the UAE. For the first part of ESR compliance, Economic substance notification needs to be filed to the respective regulatory body in the UAE, within the stipulated period i.e. within the first ESR Report filing deadline i.e. 31st Jan 2021.
Reason for implementation of ESR in UAE:
- Introduction of Value Added Tax
- Introduction of Anti-Money Laundering regulations
Do you need to file ESR?
Firms whether mainland, free zone offshore, or the financial free zones that conduct relevant activities and generate earnings in UAE, need to file ESR in UAE. These relevant activities include:
- Banking business
- Intellectual property business
- Shipping business
- Insurance business
- Holding company business
- Distribution and service center business
- Headquarter business
- Lease-finance business
- Investment Fund management business
It is important to note that multiple companies or consolidated group of companies for accounting aren’t allowed to file a single notification. Separate applications need to be filed by each company as consolidated ones are deemed invalid. Thus to avoid such a dilemma, consultation from reputed expert CA firms in Dubai is required, provided they have experience in providing ESR services.
Recent developments in ESR filing:
With the introduction of Resolution 57/2020, a new category of exemptions has been introduced. For availing the exempt status for ESR, notification needs to be filed along with documentary evidence to demonstrate the position. Also, UAE FTA will lead the charge as an authority, in place of the regulatory authority of each licensee; for:
- Assessment of meeting economic substance tests by licensees
- Penalizing for non-compliance
- Hearing and providing verdict on appeals filed by licensees
Penalties have also been increased by the same resolution, which is as follows:
- Failing ESR test- Between AED 10,000 to AED 50,000 and subsequent failure results in between AED 50,000 to AED 300,000 as penalty
Further clarifications will be required in ESR filing in the current year for firms in the distribution and Service business, as dictated by the new amendment. Also, the notification, reports, and documentation which has to be filed with the respective authority will now be done through a portal, yet to be launched by UAE MoF.
Definition of a licensee represents a juridical person (a corporate legal entity with a separate legal person from its owners) an unincorporated partnership (Partnerships in UAE without separate legal body) which conducts the relevant activity in the UAE.
Definition of an exempted licensee as per Cabinet Resolution No. 57/2020 includes:
- Entity carries business only in the UAE and is not part of the MNE group
- Investment funds
- Licensee is a tax resident in a jurisdiction outside UAE
- Licensee is a branch of a foreign entity whose relevant income is subjected to tax in a jurisdiction outside the UAE
Step by Step guide:
- Assessment for Eligibility: Firstly the firm needs to ensure that the activities they conduct fall in the list or subset of relevant activities. For confirmation or information, the firm can refer to UAE Ministry of Finance website to verify according to updated norms. Only the licensees and exempted licensees who conduct relevant activity have to file Notification within six months from the culmination of the relevant financial activity period.
- Assessment for Test: Afterwards, the firm has to ensure that they can qualify for the Economic Substance Test. Before filing for the notification, firms can find the template notification an ESR report on the Ministry of Finance website. The guidance could be found from the MoF website if the firm is perplexed in taking action, or seek directions from ESR filing companies.
- Filing: The final part of the ESR process is filing the notification to a competent authority in the UAE. As information present on the MoF website, the filing portal will go live in the first week of Dec 2020 for filing of both notifications and Economic Substance Reports for which the firm has to keep annual substance return poofs. In case the entity doesn’t fall under these rules and has to show necessary substance in UAE, an assessment to verify that the firm can satisfy economic substance as per regulations.
- Reporting: Firms have to finalize and submit the UAE ESR report to the authority on an annual basis. The firm should also have all the necessary documents ready, in case proofs are required.
The process of ESR filing is quite complex for the firm that has started or faced problems in this earlier. Information regarding the ESR and deadlines will be published as notices on the UAE MoF website. Such entities should refer to reputed and expert ESR filing firms in the UAE for assistance.