Economic Substance Regulations (ESR) was introduced in UAE by the Cabinet Decision Number 31 of 2019. It was implemented to reduce illegal tax practices which are followed in international; businesses and make sure that the correct amount of taxes are paid by the businesses.
ESR is applicable to all companies, whether it is onshore or in free zone. These businesses have to comply with the regulations, or the businesses may have to face penalties and other consequences.
Overview of ESR
According to the ESR, a company has to analyze the activities performed by it and then submit a report stating if the ‘Relevant Activities’ mentioned in the regulation are being performed by the businesses or not.
The basic steps to be taken by a company according to ESR are:
- The company should notify the relevant authority about the activities performed by that business and if any relevant activities are being performed by the company. This report should be provided before 30th of June, 2020.
- Those who do relevant activity, the 2nd step is to perform an economic substance test, which will test if the required criteria have been met by the business or not. The management of the company must submit a report to the concerned authority with information like the revenue received from the relevant activity, it’s corresponding cost, details of staff, details of office etc. This report must be submitted to the authority before 31st December.
ESR Impact on Businesses
ESR will impact businesses very much in UAE. The impact will include the following:
- Providing Regular & Accurate Reports: Businesses have to provide accurate reports to the concerned authority. It is compulsory for every business to provide annual or bi-annual reports depending upon the business activities being performed in the company. Every company needs to prepare a notification stating if the ‘Relevant Activities’ are being performed in the company or not. The above mentioned notification needs to be submitted by the 30th of June. If the answer is “Yes,” then yearly return need to be submitted to the authority before 31st December.
- Transparent Tax Information: ESR will force the businesses to use the legal and correct method of doing business. The firms have to give the correct financial information and may have to pay additional taxes.
- Liquidation & Deregistration of companies: If the company does not comply with the ESR or continuously fails in providing the relevant information or meeting any criteria of as mentioned in the law, then the entity’s license may not be renewed, or in some cases, the company may have to go through with the Liquidation of the company. It will have a great impact on the economy of the country. This will also keep the management of the company on toes so as not to make any mistakes or not provide any wrong information which will hamper the working of the business.
- Business Competitors: The ESR implementation will reduce the companies which conduct malpractices and illegal business practices and thus it will pave the way for the companies which are better and do the business in the right way, it will generate healthy competition between the companies.
Economic Substance Regulations has great importance and it will have a impact on the companies of UAE. It will affect the businesses in a positive way, but the management has to be extra careful and provide the correct and relevant information about the company at the correct time.