Companies in the UAE are required to conduct an annual self-assessment to determine the applicability of Economic Substance Regulations (ESR). The time for assessment has neared as the UAE entities are required to file their ESR notifications on or before June 30, 2021, for the financial year ended on December 31, 2020.
The first thing UAE entities must do is determine to which extent the ESR reporting obligations apply to them. They must consider any changes in the business since last financial year. In the affirmative, such entities must ensure they timely complete and submit the relevant ESR documentation to avoid the significant penalties for non-compliance. The entities can avail expert assistance of ESR consultants in the UAE for self-assessment and the filing of ESR notification, which will save them from the fines. Read ahead for valuable insights.
ESR reporting obligations of UAE entities
The assessment starts with determining if a company has done any relevant activity during the relevant financial period. The nine relevant activities are Banking, Insurance, Shipping Business, Lease-Finance Business, Headquarter Business, Holding Company Business, investment Fund Management Business, Intellectual Property Business and Distribution & Service Centre Business. If the company has conducted any of these relevant activities in the financial year ended on 31 December 2020, it must submit an ESR Notification before the deadline.
Assessment of any hidden relevant activity
If any company, carrying out trading or other business, is earning interest from loans to its foreign group entities, it's considered a relevant activity that falls under Lease-Finance Business. Similarly, if a trading company is selling or buying goods from the foreign group entity, it will be considered a relevant activity that falls under Distribution Business. Also, services providers, such as IT consultancy that provide services to its foreign group entities, will fall under Service Centre business.
Assessment should be done every year
Entities that have not conducted any activity in the year 2019 were not required to file the Economic Substance notification in 2020. However, this doesn’t mean they should stop performing an assessment for the year 2020. An entity that didn’t conduct any relevant activity in the previous financial year must assess whether or not they have carried out any relevant activity in the financial year ended on 31 December 2020. If yes, such entities must file an Economic Substance notification this year. Failing to file Economic Substance Notification will be considered as a non-compliance. Apart from that, investors must look the importance of ensuring ESR compliance while starting or closing down the businesses.
Licensee or exempted licensee?
As per the Cabinet Decision No 57 of 2020, the companies that come within the scope of ESR are classified as Licensees and Exempted Licensees. While licensees need to submit ESR notification and the ESR Report, the exempted licensees are required to submit only the ESR Notification along with evidence that substantiates their exempted status.
A licensee can be either a juridical person (incorporated inside or outside the State) or an Unincorporated Partnership registered in the UAE, including a Free Zone and a Financial Free Zone and carries out a Relevant Activity. Meanwhile, an Exempted Licensee can be,
a) a licensee that is an investment fund
b) a licensee that is a tax resident in a jurisdiction outside the UAE
c) a licensee that is wholly owned by one or more residents in the UAE provided it’s not part of an MNC group and carries out business only in the UAE
d) a licensee that is a branch of a foreign company whose Relevant Income is taxed outside the UAE
Beware of the hefty penalties
The failure to perform a proper self-assessment spells trouble for the companies as the hefty penalties will strike the entities hard. Licensees and exempted licensees that fail to submit an ESR notification are liable to pay an administrative penalty of AED 20,000. The penalty is AED 50,000 for those entities that fail to submit the Economic Substance Report. In case the violation is related for another year, the companies have to pay an administrative penalty of AED 400,000. The penalty for failing to meet the Economic Substance Test is the same as that of non-compliance with the ESR report.
A penalty of AED 50,000 waits for those entities that submit inaccurate information in ESR Notification and ESR Report. Apart from the monetary fines, non-compliance attracts other forms of punishments as well. Non-financial penalties include the exchange of information with foreign authorities and suspension, revocation or non-renewal of the entity’s trade license. Carrying out the self-assessment with the help of top ESR consultants in the UAE is the best way to avoid the penalties and other forms of consequences.
Assistance for accurate ESR assessment
Most of the non-compliant entities attract penalties due to a lack of knowledge of the ESR legislation and requirements. Lack of proper understanding about the Relevant Activities or misconceptions about the definition of an Exempted Licensee / Licensee are strong reasons why many companies become non-compliant. Missing the ESR deadline is also a common mistake committed by the companies.
The companies should try to keep up with the deadline apart from ensuring that the information provided in the notification is accurate. Apart from penalties, non-compliance will lead to the company being red marked overseas as the UAE will share information about the ESR failure with foreign authorities. This makes a strong case for availing the services of ESR consultants in the UAE such as Jitendra Chartered Accountants (JCA) who will ensure that the assessment is accurate. JCA’s team of ESR advisers will also help the companies meet the Economic Substance Test. If a company is in a non-compliant position JCA will provide remedial measures to make it compliant with ESR Test requirements.