ESR Compliance

Economic Substance Assessment in Dubai, UAE

Economic Substance Regulation in Dubai is another set of compliance requirements to be followed by all business entities. The Economic Substance Regulations is in agreement with the global standard set by the Organization for Economic Co-operation and Development (OECD) on Harmful Tax Practices. So with an objective to curb harmful tax competition, on December 1, 1997, the European Union (EU) adopted a resolution on the code of conduct of business taxation. Code of conduct group on business (COCG) was established to assess the tax measures and regimes. In the past years, the world economy has experienced a shift of trade from land-based supplies to internet-based supplies which has produced a slight though complex looking ambiguity in the taxation methods to be followed for the online structures.

In order to formalize the governance schemes in such a scenario, the EU came with a set of economic substance regulations following certain criteria that are aligned with the International standards that other states can comply with them normally.

1. Transparency under Economic Substance:

The state jurisdictions must sign the OECD’s (The Organization of Economic Corporation and Development) multilateral convention and must comply with the international standards on the exchange of information, automatic or otherwise.

2. Fair tax practice under Economic Substance:

Jurisdictions offshore structure practices to attract profit and avoid other activities that are not related to economic activity. Apart from this, they must also not have harmful tax regimes.

3. BEPS implementation:

OECD’s Base Erosion and Profit Shifting must be implemented by the jurisdiction with minimum standards, starting with a country by country reporting. So, the Organization of Economic Corporation and Development is a global forum wherein there are 36 government member states who work together along with 70 non-member economies.

The major motive of this organization is to work towards the welfare of the global economy and ensure prosperity along with sustainable development. Working in a way that is environment friendly or more specifically employing methods of development that do not compromise with the needs of the future generations is the main aim of the Economic Substance Regulation policy. For assessing and monitoring the essential activities of the all member standard jurisdictions, a sub-body of this inclusive framework known as FHTP is made responsible.

One main and basic reason for the deployment of the Economic Substance Regulation into the United Arab Emirates was to keep a check on the harmful tax regimes and that the major corporations and government bodies are not harnessing the profit of surplus producing firms in an unethical manner.

This economic substance assessment was also introduced to make sure that corporations are carrying out the real economic activities and are not indulging in just unethical profit gaining acts. DUBAI joined the OECD’s inclusive framework on the BEPS in May 2018. While joining OECD, DUBAI were committed to introduce the required economic substance regulation by the end of the year 2018.

The purpose of economic substance assessment and regulation is to ensure that the DUBAI based entities that undertake certain activities are not indulged in any artificial means to attract or shift any kind of profits that are not just and proportionate to the relevance of their contribution to the economy of the United Arab Emirates.

The Economic Substance Regulation assessment follows this strategy by confirming that the license is carrying out an activity in the DUBAI that achieves economic substance interest and the state is benefitted by its operations. Apart from this, harmful and unethical tax regimes are also checked by this economic substance assessment to ensure that the entities are not suppressed under any undue pressure.

The Economic Substance regulation is subjected to any of the DUBAI onshore companies or organizations along with free zone companies, branches, partnerships, including offshore companies and other DUBAI based business firms that carry out activities like:

      • Insurance Business
      • Shipping Business
      • Intellectual Property Business
      • Lease-Finance Business
      • Investment Fund Management Business
      • Headquarter Business
      • Holding Company Business
      • Distribution and Service Centre Business
      • Banking Business

However, entities that are part of any multinational corporation are not only subjected to the economic substance assessment but also groups and companies that are based in DUBAI and carry any relevant activity regardless of whether the entity belongs to a foreign multinational group or not.

If a company is owned directly or indirectly by the government of the DUBAI (The DUBAI federal government or by any Emirate of the UAE ) to the extent of 51% or above is exempted from the assessment and regulation of the Economic Substance.

All licensees carrying the operations on the relevant activities in the United Arab Emirates, including the free zone and financial free zone are required to follow the economic substance rule which was released on April 30, 2019.

The United Arab Emirates-based companies that are operating any relevant activities in any Emirate must satisfy the following Economic substance requirements and regulations-

      • The company’s core income-generating activities (CIGA) are operated or conducted in the DUBAI if the entity is directed and managed in the particular state in that activity.
      • If the company has an adequate number of qualified full-time employees for carrying out operations related to the firm’s business or if there is sufficient expenditure taking place for the outsourcing activities to the third parties in the DUBAI.
      • If the company has relevant physical assets or is able to attain minimum levels of expenditure on outsourcing to third parties in relation to CIGA in the United Arab Emirates.
      • If the company’s core income-generating activities (CIGA) are managed by some other senior entity, then it is checked whether the licensee has full control over and is able to monitor the activities of that particular entity.
      • If the company is able to manage the activities of its service provider for its outsourced CIGA.

As per the amended Cabinet Decision Article, a licensee must meet all the requirements of the Economic Substance Test. The Changes made in the penalties after the amendment are:

  • A fixed penalty of 20,000 dirhams (AED 20,000) shall be imposed on the business in case the company fails to notify the concerned Authority.
  • If the management of the company fails to provide complete information about the company then a penalty is levied, which can go up to a maximum of AED 50,000.
  • If the company fails to show any Economic Substance or fails to show an adequate amount of Economic substance, then the following penalties will be levied upon the business:
    • Penalty for the First year
      • Penalty up to AED 50,000
      • Exchange of the information with a foreign Competent Authority
        • Of the Parent Company
        • Of the Ultimate Parent Company
        • Of the Ultimate Beneficial Owner
      • Penalty for the Second year and Subsequent years
        • Penalty up to AED 400,000
        • Information Exchange of
          • The Parent Company
          • The ultimate Parent Company
          • The ultimate Beneficial Owner
  • The commercial licence of the company can be withdrawn, suspended or not renewed
      • The failure to meet the Economic Substance Test for the first time leads to a penalty of AED 10k to 50k, whereas AED 50k to 300k for the second consecutive failure.
      • The notification failure leads to a fine of AED 10k to 50k.
      • The failure to provide accurate or complete information leads to a penalty of AED 10k to 50k.
      • The demonstration failure of sufficient economic substance in Dubai for the first time leads to a fine of AED 10k to 50k, whereas AED 100k to 300k for the second consecutive failure.

The matters to be taken into consideration by Licensee under ESR in UAE are the following list of non-exhaustive matters to appraise the relevant activities it has performed, the amount and type of income earned from them, and holding board meetings. The license should ensure board meeting minutes are signed and maintained in Dubai and demonstrate control and supervision over any outsourcing arrangements. The license should also recognize the amount and type of expenses and the number of Dubai-based full-time employees or other personnel and their qualifications.

The goal of filing an ESR Notification is to present the concerned Regulative Authorities with some basic information on the Licensee and its pursuits in the UAE. It is a requirement to file an Economic Substance return for the Reportable Period. While filing the Economic Substance notification in the UAE, the businesses need to show that whether or not they are carrying out the relevant activity in the UAE, whether the company’s earnings are subject to tax outside the UAE, and the date of the financial year-end.

Our expert team and professional staff will facilitate you in economic substance regulation assessment in the most specialized way. Following are the benefits you will get for choosing GSPU Auditing  for Economic Substance Regulation Assessment Process:

      • Less Time and Money in Economic Substance Assessment: GSPU Auditing has worked with government agencies for the introduction of economic substance regulation and has a lot of experience in this area, which means we would be able to help you get the work done in much less time than if you did it yourself and you would also end up saving money.
      • Planning of Economic Substance Test: A key aspect of providing an economic substance assessment service is that we would try to understand your needs as well as situation to the best extent possible and then come up with a plan of action.
      • Smooth Process of Economic Substance: What GSPU would ensure is that you would simply have to provide all the necessary documents, while we would handle the rest of the incorporation process.
      • GSPU can help you go through the Economic Substance Regulation assessment without any major complexities and problems with guidance from our expert consultants:
      • Initial Check on Economic Substance Regulation: Doing a preliminary check on your business and relevant operations for the state of applicability of the test.
      • Core Assessment of Economic substance: If you are within the scope of the economic substance regulations your firm passes the economic regulations test, then a core assessment will be done.
      • Highlighting non-compliance elements: We will help you identify any elements in your business that compel your company to not meet the applicability criteria for the economic substance regulations test.
      • Economic Substance Regulation Test: We will also help you to rectify and work on the elements and weak measures that will help you pass the economic substance regulation test.
      • Economic Substance Notification Filing: We will assist the licensee in the submission of the reports and filing of the notification, report, and returns to the relevant regulatory authority.
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