On January 1st, 2019, the Economic Substance Regulation in Dubai (ESR) went into effect. On April 30, 2019, the UAE introduced a resolution on the economy (Cabinet of Ministers Resolution No.31 of 2019, or the “Regulations”).
Companies must comply with the ESR standards by taking the necessary actions.
• Adherence to notification requirements • Submitting a yearly drug report
Because ESR is regulated by the appropriate Regulatory Authorities, there are a few minor variations in how ESR returns must be filed. This covers various due dates, documentation needs, and associated fines for non-compliance. The Regulations mandate that UAE onshore and Free Zone Companies, as well as other UAE company forms, preserve a sufficient “economic presence” in the UAE regarding the “Related Activities” they engage in. Therefore, a Notification of Economic Substance must be submitted.
The UAE enforces the Economic Substance Regulations (ESR) on domestic enterprises operating there, including those operating in free zones and those involved in any of the listed “related activities.” These businesses are required to submit notices of economic substance, together with an initial description of the activities, to the regulatory authorities. Before the company can submit an economic substance report, this notification must be made.
FQA Filling ESR Notification:
1. How to file an Economic ESR?
Before ESR was implemented in the UAE, several businesses profited from the tax-free status. To prevent paying excessive taxes to the government of the original country, they relocated their profit centers to the UAE. This was a tactic some businesses employed to evade taxes while disregarding the economic advantages the UAE offers. ESR in the UAE prevents such conduct by enabling businesses to alert them through their pertinent activity. When businesses carry out the tasks listed in their trade license and have a typical UAE business arrangement, that activity is relevant.
2. Who needs to submit a Notification and by when?
Notification must be filed within six months of the end of the related financial period by exempted licensees & licensees who engage in any type of related activity, regardless of whether they received any income from that activity throughout the financial period. There is a filing facility for the ministry of finance where all alerts must be submitted.
3. Who must submit a Notification by what deadline?
Only licensees who produce revenue from a linked activity within the related financial term and who are not exempted from the requirements are required to illustrate economic substance in Dubai and apply an economic substance report (ESR). Economic Substance Reports (ESR) should be strictly applied within a year of the relevant financial term’s end.
4. When must the ESR Notification be submitted?
Notifications may be used within six months of the end of the financial period.
5. When must a report on economic substance be submitted?
Reports on economic substance must be provided within a year of the end of the fiscal year.
6. Are the Regulations applicable to branches?
When branches licensed in the UAE are only outposts for their “parent” or “head office” and don’t own independent legal selves. In this scenario, the parent business is required to submit a single licensee filing, disclosing all of its branches’ relevant activities in a single combined notification and/or Economic Substance Report (ESR). Unless the related income of the branch is taxable in the jurisdiction of the foreign parent/head office, a foreign corporation with a branch in the UAE that engages in a related activity must abide with the regulations as an individual entity.
7. Does the business license’s list of permitted activities decide whether a licensee engages in a relevant activity?
No, whether a licensee engages in a Relevant Activity is not determined by the activities mentioned on the commercial license. To assess whether a Licensee engages in related activity and is covered by the Regulations or not, a “substance over form approach” should be utilized.
8. Do licensees have to hold their board meetings in Dubai?
Yes, a licensee is required to hold an adequate number of board meetings in Dubai. The right quantity depends on the kind of pertinent activity that the company is engaged in. However, for each board conference hosted in the UAE:
• There must be a physical presence of a majority of directors in Dubai; and
• The meeting’s minutes must be kept and signed in Dubai; and
• Directors present at the board meeting must be qualified to carry out their fiduciary responsibilities.
Except if this is a requirement of the applicable licensing authority, a Holding Company Business (Holdco) is not required to be directed and managed in.
9. Does a branch file a separate Notification from its head office?
No, the revised Economic Substance Regulation acknowledges that a UAE company’s branch offices do not have independent legal identities from their parent or headquarters. Therefore, it is no longer necessary for a branch of a UAE parent business to submit separate notifications if the branch is already registered in the UAE. All that is required is a single notification detailing all of the UAE parent corporation’s branches and all Related Activities in a single, consolidated statement.
9. Does it still matter if I didn’t make any income throughout the financial period if I file a notification?
Yes, whether or not they received revenue from the relevant activity, any business that engages in a related activity throughout a financial period is obliged to apply a notification.
How much time does it take to update the Notification or Economic Substance Report (ESR)?
Amendment requests must be approved by the relevant regulatory authority. They must get in touch with the entity to get more details.
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