The European Union (EU) has blacklisted those countries that don’t have criteria to meet with EU fair taxation, tax transparency, and measurement of the (BEPS) base erosion of profit shifting.
Economic Substance Regulations: In 2019, the UAE government has introduced the Economic Substance Regulation (Cabinet of Ministers Resolution No. 31 of 2019), in UAE for un-blacklisted from the list of EU. After implementation of the Economic Substance Regulation (ESR) system, UAE has been removed from the list of blacklisted countries by the EU. On 10 August 2020, UAE cabinet Minister issued Cabinet Resolution No. 57 of 2020 Concerning Economic Substance Requirements. Which gives the revision set of Economic Substance Regulations. For the implementation of the provisions of the economic substance requirement and Ministerial Decision No. 100 of 2020 on the Issuance of Directives was introduced on 19 August 2020. This decision also repeals and replaces Cabinet of Ministers Resolution No. 31 of 2019 and Cabinet of Ministers Resolution No. 58 of 2019.
UAE Regulation Authorities
Above table source link here.
Scope of the Economic Substance Regulation
Natural persons, sole proprietors, trusts, and foundations regulations do not apply. It’s applied to:-
- Any incorporated legal person.
- unincorporated partnership registered in the license of the following activities.
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Distribution and Service Centre Business
Relevant business should obey the Economic Substance Regulation requirements:-
- Manage all income-generated activities as per ESR.
- Activities that directed and managed in the UAE
- Consideration level of the activities functions. (i) Businesses should have sufficient full-time qualified employees, (ii) Have sufficient and property physical assets in the UAE. (iii) Bear the amount of the operation expenditure in the UAE.
Penalties in Economic Substance regulation (ESR)
Businesses will be penalized if they fail in complying with ESR in UAE.
- Businesses get penalized from AED10,000 to AED 50,000 If businesses fail to present adequate ESR and also fail to provide accurate and complete information for the relevant year.
- Businesses can get a penalty of AED10,000 to AED 50,000, what if the business is failed to provide accurate and complete information about the exchange with a foreign parent company or ultimate beneficial ownership.
- If the business is failed in the second financial year in the above two things then the license could be canceled, not renewed, and withdrawn. Also, get a penalty of AED100,000 to AED 500,00.
What is the Economic Substance in Accounting?
All the transaction that has a purpose or related to the reduction of tax liability. It’s used to evaluate and examine tax to see if there is anything that is abusing the tax law. If tax abuse is found then it will be penalized by the IRS. ESR is most important because in the Substance report we provide full and accurate information about the tax transaction and other transactions in which ESR is applied during the financial year. To get more details about it Feel free to contact us, we will be happy to hear you directly. The main purpose of the Economic substance report is to provide the
National Assessing Authority with the information of license, assets, income & expenditure, employees, and governance-related to its Relevant Activities in the UAE.
If you have more than a license then you have to provide a report for each license. The Economic substance report is submitted online on the Ministry of Finance portal.