The Economic Substance Regulation (ESR) in the UAE was introduced in 2019 to ensure that companies based in the UAE conducting specific business activities are not taking undue advantage of the country’s favorable tax regime without having substantial operations within the UAE. ESR compliance has become a critical part of corporate governance for businesses in Dubai and across the UAE, and failure to comply can lead to severe penalties.
A key component of the ESR compliance process involves submitting timely and accurate ESR Notifications and Reports. These documents are critical for demonstrating that a company is conducting genuine economic activities within the UAE and meeting the substantial requirements of the regulation. In this article, Highmark Accountants will provide a detailed guide on ESR Notifications and Reports in the UAE, including what they are, why they matter, and how to ensure compliance.
What are ESR Notifications?
The ESR Notification is the first step in the compliance process. Every business that conducts “Relevant Activities” under the ESR is required to submit this notification to the relevant regulatory authority. This submission is usually done on an annual basis, and its purpose is to inform the authority whether or not the business is engaged in activities that fall under the scope of the ESR.
The ESR Notification must include details about the company, including:
Whether the business conducted any of the relevant activities during the financial year.
Whether the business earned income from these activities during the financial year.
Whether the business qualifies for any ESR exemptions (such as being a UAE tax resident or a branch of a foreign entity whose income is taxed outside the UAE).
The information provided in the ESR Notification helps the authority determine if a business must submit an ESR Report.
What are ESR Reports?
The ESR Report is a more detailed submission required from businesses that conduct relevant activities and earn income from them within the UAE. It provides comprehensive information about how the business meets the economic substance requirements.
This report must demonstrate that the company:
Is being directed and managed in the UAE.
Conducts core income-generating activities (CIGA) in the UAE.
Has adequate physical assets, employees, and expenditure in the UAE relative to its business activity.
The ESR Report includes financial details, the company’s operational structure, the number of employees, and the premises the business uses. It’s submitted after the ESR Notification, and must be filed within 12 months of the end of the financial year. Businesses that fall under the ESR must file the report annually.
Who is Required to Submit ESR Notifications and Reports?
The ESR applies to companies carrying out any of the following Relevant Activities:
Banking
Insurance
Investment Fund Management
Lease-Finance
Shipping
Holding Company
Headquarters Business
Intellectual Property (IP)
Distribution and Service Center
If your business conducts any of these activities, you are required to submit the ESR Notification annually. If your business also earns income from these activities, you will need to submit an ESR Report.
Some businesses may be exempt from filing the ESR Report, such as those with branches outside the UAE that are taxed in their home jurisdiction or those that meet specific criteria for exemption. However, even exempt businesses must file the ESR Notification to inform the authorities of their exemption status.
Importance of Timely Filing ESR Notifications and Reports
Failure to file ESR Notifications and Reports on time, or submitting inaccurate information, can result in significant penalties and consequences. The penalties for non-compliance range from AED 20,000 to AED 50,000 for the first year, with escalating fines for repeat offenses. Additionally, continued non-compliance can lead to the suspension or revocation of business licenses, and companies may even be subject to dissolution.
Furthermore, businesses that fail to meet the economic substance requirements may be reported to foreign tax authorities, leading to greater scrutiny of their global operations. This can severely impact a company’s reputation and hinder future growth prospects.
How to Ensure ESR Compliance
The process of submitting ESR Notifications and Reports requires a clear understanding of the regulation, accurate financial reporting, and careful documentation of business activities. Many businesses may find the process complex and challenging to navigate without expert assistance. That’s where Highmark Accountants can help.
At Highmark Accountants, we offer comprehensive ESR compliance services to ensure your business meets all regulatory requirements. Our team of experts can guide you through the entire process, from determining if your business falls under the scope of the ESR to preparing and filing accurate ESR Notifications and Reports.
Here’s how we can assist your business:
1. ESR Self-Assessment
We conduct a thorough self-assessment to determine whether your business falls under the scope of the ESR. We assess your company’s activities and income to determine whether you are required to file notifications and reports.
2. Filing ESR Notifications
We ensure timely submission of ESR Notifications with accurate information. This includes identifying any exemptions your business may qualify for and ensuring that all relevant details are reported correctly.
3. Preparing and Submitting ESR Reports
For businesses that are subject to the ESR, we prepare detailed ESR Reports that demonstrate compliance with the economic substance requirements. Our experts ensure that all CIGA and other criteria are met and accurately reflected in the report.
4. Ongoing Compliance Support
Compliance with the ESR is an ongoing process. We provide continuous monitoring of your business activities to ensure that you remain compliant year after year. Our team stays up to date with any regulatory changes and updates to ensure that your company remains compliant with evolving requirements.
Conclusion
The Economic Substance Regulation is a critical part of the UAE’s commitment to meeting international tax standards. As part of this regulation, businesses conducting relevant activities must submit ESR Notifications and, in some cases, detailed ESR Reports. Failure to comply can result in severe financial penalties, reputational damage, and operational disruptions.
Highmark Accountants is dedicated to helping businesses in the UAE meet their ESR compliance obligations. Our expertise in regulatory compliance ensures that your business files timely and accurate ESR Notifications and Reports, avoiding penalties and maintaining good standing with the authorities.
If your business falls under the scope of the ESR or if you need help understanding your obligations, contact Highmark Accountants today. Let our team guide you through the complexities of ESR compliance and help safeguard your business’s future in Dubai, UAE.
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A Comprehensive Guide to ESR Notifications and Reports in UAE: Highmark Accountants