TAX

Tax Alert - April 2021

Are you ready for the next Economic Substance Filing?

As you may be aware, the Economic Substance Regulations (ESR) is an annual compliance requirement in the UAE. For the financial year ended 31 December 2020 (FY20), UAE businesses are required to file their ES Notifications no later than 30 June 2021 through the Ministry of Finance (MoF) ESR Portal.

It is strongly recommended that UAE businesses periodically assess their business activities to report any change in Relevant Activities; and determine whether the business would be in-scope or exempted from Economic Substance (ES) Reporting for the relevant reporting year.

 

Backgound

The Economic Substance Regulations (ES”) was first introduced in the UAE in April 2019 through Cabinet Resolution No. 31 and was recently amended by Cabinet Decision No. 57, along with the updated guidance (Ministerial Decision No. 100 of 2020) in September 2020. The Amended ESR applies retrospectively from 1 January 2019. The ESR requires UAE onshore and free zone companies that carry out “Relevant Activities” to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake i.e. ES Test.

 

An annual ES Notification is required to be submitted by Licensees (including Exempted Licensees) within six months from the end of the relevant financial period. For entities that undertake a “Relevant Activity”, they will also be required to submit a full ES Report within 12 months from the end of their financial year.

 

Click here for our Tax Alert on Amended ESR in the UAE.

 

The first reporting year was FY19 where most UAE business have successfully submitted their ES Report on or before 31 December 2020. The deadline was later extended to 31 January 2021 to support the businesses that have been impacted by Covid-19.

The Federal Tax Authority has levied penalties to several Licensees for non-compliance with respect to FY19 ESR filing, including multiple submission and non-submission of ES Notifications and ES Reports. Licensees can file an appeal through the MoF ESR Portal on certain grounds i.e., (i) it did not commit a violation; (ii) the penalty imposed is not proportionate to the violation; and (iii) the administrative penalty imposed exceeds the limit prescribed.

 

Penalties

Failure to resubmit an ES Notification will result in fine of AED 20,000 and failure to comply with the ESR (including failure to file an ES Report, demonstrating economic substance and providing inaccurate or incomplete information) will result in fine of AED 50,000 in any fiscal year. The fines can reach up to AED 400,000 and can expose a UAE entity to spontaneous exchange of information with the Foreign Competent Authority, as well as other administrative sanctions such as the suspension, revocation or non-renewal of the entity’s trade license or permit.

 

Next Steps

Businesses are required to assess whether they fall within the remit of any Relevant Activity under the ESR and understand their filing obligations for each reporting year. For FY20, UAE businesses are required to file their ES Notifications by 30 June 2021 and ES Report (where applicable) by 31 December 2021.

 

Contact Us

Our tax team can support your businesses with:

  • Economic Substance Impact Assessment
  • Assistance in Filing Economic Substance Notification
  • Assistance in Filing Economic Substance Report
  • Assistance in Appeal Process

Get in touch with our team of experts, Steven Ireland, the UAE Head of International Tax, and Amisha Anil, our Tax Manager to further assist you on this matter.