Should businesses redo their accounting ways?
It's only the first year that local businesses need to file their ESR reports. Image Credit: Pixabay

Now is the time for UAE corporates to comply with the ESR (Economic Substance Regulations) before the deadline of December 31. The Ministry of Finance (MoF) has worked over time to release an array of notices, statutory forms and guidance notes to ensure adequate details are at the disposal of licensees to prepare.

And true to its commitment, MoF also released the portal (on time) where licensees are required to file their ESR reports. Here are a few aspects a licensee should consider to ensure seamless filing:

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Standalone financial statements

ESR reports mandate submission of all financial information from relevant activities. The centralised structures of many UAE businesses may result in the preparation and audit of financials (that too consolidated) only at the headquarters level. In cases where audited standalone financial statements are not available, licensees may evaluate as to whether management-certified accounts should be submitted.

No employees

Within the UAE corporate group structure, there could be many companies formed only to hold shares and investments in others. The challenge which licensees are facing while reporting for ESR is that these holding companies may not have any employees. In such cases, the involvement of employees at the HQ may be reported under the "outsourcing provider" details to demonstrate that the operations of the holding company business meet the adequacy test.

No expenditure

In case of certain relevant activities (like lease finance), there may be a scenario where no expenditure is incurred by the licensee or employees on a full-time basis. This may emanate from the fact that the loan provided to the group company was one issued prior to 2019. And only an accounting entry is passed in the book of accounts for the accrual of the interest.

In such cases, the licensee does not undertake any significant activity nor incur any expenditure. While reporting nil expenditure for such transactions, licensees should be able to substantiate the facts through relevant documentation.

No board meetings

From an ESR standpoint, reporting details of board meetings is a mandatory requirement (except for licensees engaged in a holding company). However, in the absence of a structured secretarial law in the UAE, there may be cases where no board meetings are held during the year.

Licensees should evaluate whether the reported relevant activity even warrants an approval of the board. For example, a loan given to a group company, which is a relevant activity as per ESR, may not be an important matter that requires specific board approval.

However, such licensees should maintain appropriate back-up documentation to support the decision-making sequence to demonstrate economic substance.

Additional info

An ESR report provides an option to the licensee to upload any additional information the licensee may deem fit. Licensees part of a large private family group in the UAE can use this data field strategically to inform the authorities of their peculiar business structures and may share their facts through a clarificatory note.

Certain information fields in ESR reports may create a doubt as to what response is required to be filled. While the guidance notes issued by the MoF provide assistance, in case of doubt, clarification can be sought by writing to the MoF. The ministry generally responds within 24-36 hours.

It is the first round of ESR compliance, and both the licensees and authorities are working hard to make this a success. With the law evolving, challenges faced during this year are bound to smoothen out, making issues clearer for authorities and licensees.

The final sprint of the ESR marathon calls for an Usain Bolt performance, fast and agile but backed up by meticulous planning to ensure flawless execution.

- Nimish Goel is Partner and Kapil Bhatnagar Director at WTS Dhruva Consultants.