ESR Compliances Require Strict Adherence, Says Experts

UAE Ministry of Finance had announced the details of the Cabinet Resolution No. (57) Of 2020 with regard to the Economic Substance Regulations (ESR) in August 2020. As part of a webinar conducted by the Dubai Chamber in association with Al Tamimi & Company, experts said that the companies need to stay updated on the ESR to avoid any fines or penalties which may follow.

The webinar titled “Key aspects of Economic Substance Regulations” discussed about the implementation of the ESR and how it was brought in to ‘help businesses to demonstrate the economic presence in UAE’.

According to the Cabinet Resolution No. 31 of 2019, in order to access the territory’s tax regime, the companies engaged in the specified sectors must have adequate economic substance within the territory. The changes were made due to the pressure from the European Union (EU) on a number of territories.      The EU Code of Conduct Group gave in recommendations for the same and could apply for financial years beginning from 1st January 2019 or after. The major activities identified by the European Commission Code of Conduct Group include:

  • Banking
  • Insurance
  • Fund management
  • Financing and leasing
  • Shipping
  • Intellectual property
  • Collective investment vehicles
  • Holding companies that generate income from any of the above mentioned activities

Head of taxation at Al Tamimi & Company, Shiraz Khan stated, many countries that do not have plenty of natural resources to gain a mass income from depend on the taxes to fund their public expenditure. “Many international companies around the world, with the advent of globalisation, were essentially operating in multiple countries and moving money from high tax jurisdictions into low tax jurisdictions and therefore paying less tax as a result.” Tax evasion was one of the major concerns during the 2008 downturn, he added.

Ministry of Finance has issued the Cabinet Resolution No. (57) of 2020 regarding the ESR after consulting with the Organisation for Economic Cooperation and Development (OECD) and the European Union Code of Conduct Group. It was passed to engage companies in more relevant activities. It had also amended the ESR included in the Cabinet of Minister’s Resolution No. 31 of 2019. The UAE Federal Tax Authority (FTA) has been appointed as the National Assessing Authority for ESR under the new resolution.

In order to carry out any of the relevant activities, the licensee term has also been amended “to be limited to judicial persons and unincorporated partnerships that are registered” (by a commercial or trade license or any other form of permit). The economic substance regulations will no longer be applicable for sole proprietorships, natural persons or any other business forms which are not judicial entities.

Noff Al Khafaji, Senior Associate of Corporate Structuring at Al Tamimi & Company mentioned the MoF’s Covid-19 advisory notification which came out in May 2020 regarding the extension of the deadline and about the considerations provided to businesses in the light of the pandemic. Later, in January 2021, the MoF announced the extension of filing the ESR from 31st December to 2020 to 31st January 2021.

Noff Al Khafaji also added the details of the penalties. The failure to provide notifications or documentation or any relevant information will be charged AED 20,000. Providing inaccurate information will be fined AED 50,000 and the failure to submit the ES report can result in a fine of AED 50,000 in the first year and will be AED 400,000 in the second consecutive year.

The ESR was issued by the government to ensure that the reports submitted by the entities who engage in specific fields are accurate. It helps the government to be sure of its economic condition and to bring in tax transparency and to have fair tax compensation in the country.