Most importantly, businesses with a fiscal year ending on December 31 should be aware of the looming June 30, 2023, deadline for submitting ESR notifications, and those with fiscal years ending on June 30 should think about whether they must submit an ESR report by that date.
What is required by the ESR?
The ESR demands that Licensees show they have a real economic presence in the UAE and that the actions they engage in are not just motivated by taxes. Beginning on January 1, 2020, licensees may be required to create and submit an annual (if appropriate) economic substance notification (Notification) as well as an economic substance report (Report).
Economic Substance Test
According to the ESR, Licensees must maintain an acceptable presence in the UAE in order to conduct Relevant Activities that generate revenue/income (either a profit or a loss), such as by maintaining an adequate amount of assets or a sufficient number of qualified workers. Additionally, the Licensee must make its strategic management choices in the UAE. They must therefore pass a "Economic Substance Test," as it is known. The sort of Relevant Activity that a Licensee engages in in the UAE may influence the level of economic substance that it must demonstrate in order to pass the Economic Substance Test.
Now the following are the relevant activities:
(i) Banking business
(ii) Insurance business
(iii) Investment fund management business
(iv) Lease-finance business
(v) Headquarter business
(vi) Shipping business
(vii) Holding company business
(viii) Intellectual property business
(ix) Distribution and service centre business
A Notification and perhaps a Report must be prepared and submitted to the Ministry of Finance by any Licensee engaging in any of the aforementioned activities.
If the Licensee has carried out one or more Relevant Activities during the previous year, the Ministry of Finance mandates that a Notification be filed by the Licensee. The Licensee must confirm in the Notification whether it engaged in any Regulated Activities and if those Activities resulted in revenue for the Licensee during the Reportable Period. Each year, the Notification must be sent within six months of the conclusion of the Licensee's fiscal year.
Even if their company qualifies for one of the ESR's exclusions, licensees who engage in one or more relevant activities are still required to file a notification.
The major objective of an ESR Report is to ask licensees engaged in relevant activities in the UAE to give the ministry of finance details about their revenue, expenses, assets, personnel, and governance in relation to those relevant activities. Each year, the Report must be submitted within a year after the Licensee's fiscal year end.
Unless they qualify for an exemption, licensees who engage in any relevant activity that generates money in the UAE are required to submit an annual report proving that they satisfy the economic substance test requirements. With one exception, a business that engages in a relevant activity but generates no revenue from it during the reporting period is exempt from the requirement to pass the economic substance test and submit a report during that time.
Similar information to that needed to be revealed in the Notification must also be disclosed in the Report. The Licensee must, nonetheless, submit further details about its financial performance, such as the total revenue for the reportable period, the accounting profit or loss, and a breakdown of its financial statements. Also necessary is the Licensee.
Legal entities must carefully consider their Relevant Activities and their income to determine if they must file a Notification and a Report. Legal entities should start gathering the proof that might be needed to support the Notifications and Reports required by the ESR as well in order to minimize the danger of fines.
If you have any questions about the ESR or how it applies to your company, Freemont Oneworld Group is here to help you. We will be happy to assist you and determine whether the ESR is applicable to your company and what you should do next to ensure compliance.