As part of the UAE’s commitment as a member of the Organisation for Economic Cooperation and Development (OECD) inclusive framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the ‘‘Regulations”) on 30 April 2019. This regulation was implemented to reduce illegal tax practices and wrongdoings in the business community. This regulation will put a stop to wrong tax practices followed in international business and will ensure that the correct amount of taxes is paid by the companies in the respective countries where the ultimate beneficial owner is based.
These regulations are applicable to all businesses, whether established onshore or in a free zone, and certain other business forms that carry out any of the defined ‘‘core income-generating activities (CIGA)” listed below:
- 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 center business
To meet the economic substance requirement, companies will generally get to satisfy the subsequent three tests:
- The corporate should be directed and managed in the UAE for the specific activity.
- The company’s CIGA should be performed in the UAE.
- The company should have an adequate level of qualified employees, premises and annual operating expenditures.
Major impacts of ESR on businesses
The UAE government has implemented ESR regulations whose deadlines are coming very near. The Economic Substance Regulations will have a great impact on the companies within the United Arab Emirates. The impact will include the following:
-
Reporting obligations
Each noon is required to provide annual or bi-annual “economic substance return” specifying how the entity complied with substance rules. As the implementation date of the various economic substance laws in some of the noons was 1 January 2019, the reporting obligations relating to compliance with the economic substance rules for entities incorporated prior to 1 January 2019 is as early as 1 July 2019 in some of this noon.
The noon entities are required to submit the following details while filing the obligations:
- Business/incomes types
- Amount and type of gross income
- Amount of operating expenditure
- Details of premises
- Number of qualified employees, including experience levels, employment terms, qualifications, and period of employment
- Details of CIGA’s (for each economic activity conducted)
- Financial statements
- Details of outsourced CIGA’s (if applicable)
- Business plans, especially relating to reasons for holding intellectual property in the noon
Penalties for non-compliance
If the company fails to comply with ESR requirements, then a penalty will be imposed on it. The amount of the penalties are determined by the economic substance laws of the company and is not uniform.
Liquidations and deregistration of companies
If the company repeatedly does not comply with the Economic Substance Regulations or continuously fails in providing the relevant information, then the entity’s license may not be renewed, or in some cases, the entity may have to go through with the liquidation of the company. This will have a great influence on the economy of the country.
Transparent tax information
The implementation of ESR will force the entity to use the legal and correct method of doing business. As a result, the entities will have to provide correct financial information and may have to pay additional taxes.
Contact KGRN for any queries or support on ESR
About appeal user-guideThis user-guide has been prepared to assist Licensees in submitting an appeal request to the Federal Tax Authority (National Assessment Authority) related to Administrative Penalties levied concerning Economic Substance Regulations.
This guide will also assist the Licensees in following:How to submit an appeal caseHow to provide supporting documentsCommon Mistakes When Submitting an AppealList of penalties based on Cabinet Resolution No 57 of 2020Appeal timeframeThis user-guide designed for the use of all persons who would like to submit an application to the National Assessment Authority to appeal against decisions of Economic Substance Regulations administrative penalties issued to the licensee or the exempted licensee.If you have any further inquiries about Economic Substance Regulations, please contact usPlease note that the National Assessment Authority does not provide advice on Economic Substance Regulations.
For any questions related to the scope and application of regulations for relevant activities, you should review the information on the Ministry of Finance page, or obtain professional advice.The Objective of appealWhat is appeal?The appeal request is one of the services provided based on Article (17) of the Cabinet of Ministers Resolution No 57 of 2020 concerning Economic Substance Requirements.
Whereas, the licensee or the exempted licensee may appeal to the National Assessment Authority on its decision to impose an administrative penalty on him for any of the following grounds:It did not commit the violation attributed to it;The administrative penalty imposed is not proportionate to the violation;The administrative penalty imposed exceeds the limited prescribedHow to apply for appealStep 1: The licensee or the exempted licensee must submit appeal request through the Ministry of Finance PortalThe Economic Substance Regulations system is only available in English.
Please note that the FTA will not accept any other form of submission of appeals related to Economic Substance Regulations.Step 2: After logging in, you will be forwarded to licensee’s dashboard – HomeStep 3: An appeal must be submitted for each administrative penalty separately.
To submit an appeal request Click on “File Appeal”The system shows the deadline for submitting appeal request and payment of the penaltyThe deadline for submitting an appeal is (40) forty working days from the date on which such administrative penalty is leviedThe final deadline for paying the penalty is (40) forty working days from the date on which such administrative penalty is levied, the calculation of the final deadline for paying the penalty is stopped upon submitting the appeal request, and it will be resumed if the appeal request is rejected or withdrawn.Step 4: On the Appeal request page, the applicant must add a simplified explanation of the reason for submitting the appeal request and Attach the supporting documents to the appeal request.
