Economic Substance Regulations, UAE
The UAE government has introduced a new compliance requirement related to Economic Substance by passing the Cabinet of Ministers Resolution No.31 of 2019, the “Regulations”. The Resolution was passed on April 30, 2019, and the new Regulations are applicable from the financial year starting on or after January 1, 2019.
The UAE was required to introduce the Economic Substance Regulations (ESR) to honour its commitment as a member of the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS).
Governments of countries that have low or no corporate taxes introduce ESR in their countries to comply with international initiatives to combat harmful tax practices such as unlawful avoidance or evasion.
The Economic Substance Regulations UAE is applicable to all entities holding a license to operate in the UAE from any licensing authority. These entities include onshore, free zone, and offshore companies that carry out the below mentioned relevant activities:
- Banking Business
- Insurance Business
- Investment Fund management Business
- Lease – Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual property Business (“IP”)
- Distribution and Service Centre Business
The Economic Substance Regulations UAE have the following compliance and reporting requirements:
Notifications to Regulatory Authority
All the Companies/Licensees need to submit a notification to the Regulatory Authorities within the given deadline. Failure to provide notification can attract penalties from AED 10,000 to AED 50,000.
For the financial year ending on 31st December 2021, the date of Notification Filing was 30th June, 2022 & the last date of Report Filing is 31st December, 2022. For the next fiscal year which ended on 31st March, 2022, the last day of Notification Filing is 30th September, 2022 & the last date of Report Filing is 31st March, 2023.
Filing of Economic Substance Regulations Return
Companies that earn an income from a relevant activity, mentioned above, during the financial period need to demonstrate the Economic Substance in the UAE and need to file the ESR return. The companies are also required to meet the Economic Substance Test (EST) as per the Regulations and Guidance. The ESR return should be filed within 12 months from the end of the financial period to avoid high penalties.
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