Economic Substance Regulation reporting and notification deadlines upcoming

17 March 2022

Businesses in the UAE with a financial year of 31 March 2021 and that carried out a “Relevant Activity” during the financial year must file an economic substance regulations (ESR) report by 31 March 2022. The ESR report is required if the business is earning income from the relevant activity and is not eligible to claim an exemption under the ESR.

Businesses with a financial year ending 30 September 2021 are required to file an ESR notification by 31 March 2022 if a Relevant Activity is undertaken (even if the same activity was carried out and notified for financial year ended 30 September 2020).

The ESR was introduced in 2019 as part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the EU Code of Conduct Group on Business Taxation. The ESR subsequently has been amended and guidance issued. The ESR requires UAE onshore and free zone companies and certain other business forms that carry out relevant activities to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake. Relevant activities are as follows:

Banking business
Insurance business
Investment fund management business
Lease finance business
Headquarter business
Shipping business
Holding company business
Intellectual property business
Distribution and Service centre business

ESR notification and reporting are two separate filings and an annual obligation for licensees that are within the scope of the ESR. Entities that fall within the scope of the ESR must submit an annual notification to the regulatory authority on whether or not they have carried out any Relevant Activity (and whether it has generated income from the activity) and an ESR report within 12 months from the end of the financial year. An entity is exempt from the report obligation for any financial period in which it has not earned income from a Relevant Activity or if it fulfils the conditions for being exempt, but the notification form must be submitted if the entity is carrying on a Relevant Activity.

Failure to submit a timely notification or report will attract penalties ranging from AED 20,000 - AED 400,000. This is the second year of filing, so the higher penalty of AED 400,000 will apply if the ESR report is not filed in a timely manner and if the business was not compliant in the previous year.

Below is a summary of upcoming deadlines:

It should be noted that with the introduction of corporate tax and transfer pricing regimes, the ESR may be revised (for an overview of the new corporate tax rules, see the article in the February 2022 issue of Corporate Tax News). Clarification is awaited from the Ministry of Finance.

Ashish Athavale
ashish.athavale@bdo.ae

Brian Conn
brian.conn@bdo.ae

Mufaddal Safdari
mufaddal.safdari@bdo.ae