ESR Assessment in the UAE
With an objective to curb harmful tax competition, on December 1, 1997, the European Union (EU) adopted a resolution on the code of conduct of business taxation. Code of conduct group on business (COCG) was established to assess the tax measures and regimes. In the past years, the world economy has experienced a shift of trade form the land-based supplies to the internet-based supplies which has produced a slight though complex looking ambiguity in the taxation methods to be followed to for the online structures.
In order to formalize the governance schemes in such a scenario, the EU came with a set of resolutions following certain criteria that are aligned with the International standards that other states can comply with them normally.
The listing of the three criteria is as follows-
- Transparency:– The state jurisdictions must sign the OECD’s (The Organization of Economic Corporation and Development) multilateral convention and must comply with the international standards on the exchange of information, automatic or otherwise.
- Fair tax practice:– Jurisdictions offshore structure practices to attract profit and avoid other activities that are not related to economic activity. Apart from this, they must also nit have harmful tax regimes.
- BEPS implementation:– OECD’s Base Erosion and Profit Shifting must be implemented by the jurisdiction with minimum standards, starting with a country by country reporting.
So, the Organization of Economic Corporation and Development is a global forum wherein there are 36 government member states who work together along with 70 non-member economies. The major motive of this organization is to work towards the welfare of the global economy and ensure prosperity along with sustainable development. Working in a way that is environmentally friendly or more specifically employing methods of development that do not compromise with the needs of the future generations is the main aim at the ESR policy. For assessing and monitoring the essential activities of the all member standards jurisdictions, a sub-body of this inclusive framework known as FHTP is made responsible.
Why was ESR introduced to the UAE?
One main reason and also the basic reason for the deployment of the ESR into the United Arab Emirates was to keep a check on the harmful tax regimes and that the major corporations and government bodies are not harnessing the profit of surplus producing firms in an unethical manner. This assessment was also introduced to make sure that corporations are carrying out the real economic activities and are not indulging in just profit unethical profit gaining acts. UAE joined the OECD’s inclusive framework on the BEPS in May 2018. While joining OECD, UAE committed to introducing the required standards by the end of the year 2018.
- Less Time and Money: Aviaan Accounting has worked with government agencies for the same, and has a lot of experience in this area, which means we would be able to help you get the work done in much less time than if you did it yourself and you would also end up saving money.
- Planning: A key aspect of this service is that we would try to understand your needs as well as situation to the best extent possible and then come up with a plan of action.
- Smooth Process: What Aviaan Accounting would ensure is that you would simply have to provide all the necessary documents, while we would handle the rest of the incorporation process.
What is the purpose of the ESR?
The purpose of this assessment and regulation is to ensure that the UAE based entities that undertake certain activities are not indulged in any artificial means to attract or shift any kind of profits that are not just and proportionate to the relevance of their contribution in the economy of the United Arab Emirates. The ESR assessment follows this strategy by confirming that the license is carrying out an activity in the UAE that achieves economic substance interest and the state is benefitted by its operations. Apart from this, harmful and unethical tax regimes are also checked by this assessment to ensure that the entities are not suppressed under any undue pressure.
Who is subject to the ESR assessment?
The ESR regulation needs any of the UAE onshore companies or organizations along with free zone companies, branches, partnerships, including offshore companies and other UAE based business firms that carry out activities like Banking business, lease finance business, holding company business, intellectual property business, investment fund management business, headquarter business, insurance business, distribution and service centre business to go through the assessment. However, entities that are part of any multinational corporation are subjected to the assessment but also groups and companies that are based in the UAE and carries any relevant activity regardless of whether the entity belongs to a foreign multinational group or not
Who are exempted from the ESR assessment?
If a company is owned directly or indirectly by the government of the UAE (The UAE federal government or by any Emirate of the UAE) to the extent of 51% or above is exempted from the assessment and regulation of the ESR.
What is the applicability of the Economic Substance Regulations in the UAE?
All licensee carrying the operations on the relevant activities in the United Arab Emirates, including the free zone and financial free zone are required to follow the rule which was released on April 30 2019.
How to meet the Economic Substance Regulations test?
The United Arab Emirates-based companies that are operating any relevant activities in any Emirate must satisfy the following Economic substance requirements and regulations-
- The company’s core income-generating activities (CIGA) are operated or conducted in the UAE.
- If the entity is directed and managed in the particular state in that activity.
- If the company has the adequate number of qualified full-time employees for carrying out operations related to the firm’s business or if there is sufficient expenditure taking place for the outsourcing activities to the third parties in the UAE.
- If the company has relevant physical assets or is able to attain minimum levels of expenditure on outsourcing to third parties in relation to CIGA in the United Arab Emirates.
- If the company’s core income-generating activities (CIGA) are managed by some other senior entity, then it is checked whether the licensee has full control over and is able to monitor activities of that particular entity.
- If the company is able to manage the activities of its service provider for its outsourced CIGA.
What are the penalties for not compiling in the ESR assessment?
For failing to meet an economic substance regulation test a fine of about AED 50,000 be charged.
If after an initial notice if the company fails to meet an economic substance test of a financial year a fine of up to AED 30,000 may be charged.
Non-renewal, suspension, or revocation of a license.
Aviaan Accounting can help you to go through the ESR assessment without any major complexities and problems with guidance from our expert consultants: –
- Doing a preliminary check on your business and relevant operations for the state of applicability of the test.
- If the within the scope of the regulations your firm passes the economic regulations test, then a core assessment will be done.
- We will help you identify any elements in your business that compel your company to not meet the applicability criteria for the economic substance regulations test,
- We will also help you rectify and work on the elements and weak measures that will help you pass the ESR test.
- We will assist the licensee for the submission of the reports and that for filing the notification, report, returns to the relevant regulatory authority.
Any questions and queries that you may have regarding ESR Assessment in the UAE and its intricacies are welcome. We will respond to your queries in a quick time. Contact us now.