Economic Substance Regulation (ESR)
Cabinet Decision Number 31 of 2019 established the Economic Substance Regulations (ESR) in the United Arab Emirates. This legislation was set up to prevent unethical tax practices and other wrongdoings in the business sector.
This legislation will prevent unethical tax tactics in international company and guarantee that firms pay the right amount of taxes in the countries where the ultimate beneficial owner is located.
Furthermore, these rules apply to all businesses, whether they are located onshore or in a free zone. These businesses must follow the rules or risk facing penalties and other consequences.
The 03 fundamental actions that a firm must do in order to ensure compliance with the Economic Substance Regulation:
- The company should notify the appropriate authority about its business operations and if any relevant actions are being carried out by the company. There is no need to proceed to steps 2 and 3 if it is determined that the firm is not engaged in any relevant activity.
- The second stage for those who engage in relevant activity is to conduct an economic substance test, which will determine whether or not the firm has satisfied the required criteria. The company’s management must submit a report to the appropriate authorities detailing the income generated by the relevant activity, the costs associated with it, the personnel data, and the location of the office, and the other relevant information.
- The firm should have a sufficient number of qualified employees, as well as suitable facilities and annual operating expenditures.
Impact of ESR on Businesses
Regular and Accurate Reports
Each activity must provide a yearly or bi-annual “economic substance return” detailing how the organization complies with substance regulations. Because the different economic substance regulations took effect on 1 January 2019 in some of the activities, reporting requirements pertaining to compliance with the economic substance rules for businesses formed prior to 1 January 2019 can begin as early as 1 July 2019.
The activities required to submit the details mentioned below:
-Banking Businesses
-Insurance Businesses
-Investment Fund Management Businesses
-Lease-Finance Businesses
-Headquarter Businesses
-Shipping Businesses
-Company Businesses
-Property Businesses
-Distribution and repair Centre Businesses
Non-compliance penalties
A penalty will be levied on the firm if it fails to comply with ESR standards. The fines’ amounts are set by the company’s economic substance regulations and are not consistent.
Companies’ liquidations and deregistration
Companies’ liquidations and deregistration
If a firm consistently fails to comply with the Economic Substance Regulations or fails to provide the required information, the entity’s license may not be renewed, and the company may be forced to liquidate. This will have a significant impact on the country’s economy.
Transparent tax information
The adoption of ESR will push the company to conduct business in a lawful and right manner. As a result, the firms will be required to furnish accurate financial data and may be subject to extra taxes.
Strong Business Competitors
The adoption of ESR will help in the reduction of firms that engage in unethical and unlawful business activities, paving the way for companies that are better and conduct business ethically. This will assist to encourage friendly competition among the firms, which will help to boost profits.
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