Resolution No. 57 of 2020 from the UAE Cabinet of Ministers presents the Economic Substance Regulations. It requires businesses to encounter stated compliance criteria engaged in relevant activities such as banking, insurance, fund management, leasing, holding companies, and intellectual property businesses. Non-compliance to the defined compliance criteria can lead to momentous penalties. It may include hefty fines and potential business troubles.
What are the offenses and their penalties under Economic Substance Regulations?
Economic Substance Regulations are planned to ensure that companies operating business activities in a particular authority have genuine economic activity there. It is important to note that non-compliance with these regulations leads to several offenses such as;
1- Failure to File ESR Notification
The prime offense under the Economic Substance Regulations is failure to file the ESR notification as per the stated deadline. All entities engaged in the relevant activities are compulsory to alert the regulatory authorities regarding their economic substance status.
Penalty
- The penalty for failure to submit the notification as per the stated timeline is a penalty of AED 20,000.
2- Failure to Submit ESR Report
Entities engaged in the relevant activities have to file an annual ESR report. It must establish its economic substance in the UAE. Failure to submit the ESR report is also considered an offense.
Penalty
- Failure to submit the ESR report leads you to face a penalty of AED 50,000.
3- Wrong or Deceptive Information
The most terrible considered offense is providing wrong or misleading information in the ESR notification or report. This contains any attempt to fake records or bias the scope of economic substance.
Penalty
- Entities providing wrong information have to face hefty penalties. It may range from AED 50,000 to AED 400,000. This amount depends on the severity and aim behind the imprecisions.
4- Failure to Establish Economic Substance
Even if an entity files the essential notifications and reports, but fails to establish suitable economic substance in the UAE is also considered as an offense. This comprises;
- Not meeting the core income-generating activities (CIGA) requirements
- Inadequate local expenses
- Insufficient staff
Penalty
- The primary failure to establish economic substance will lead you to face a penalty of AED 50,000.
- Repetitive failure in the following years will cause you to suffer a higher penalty of AED 400,000.
5- Continual Non-Compliance
Entities that insistently fail to obey all the Economic Substance Regulations over several reporting periods face intensified penalties and more strict consequences.
Penalty
- Continual non-compliance will lead you to suffer a penalty of up to AED 400,000.
- Note that regulatory authorities can suspend, cancel, or refuse for renewal of the trade license of the entity.
6- Insubordination with Regulatory Authorities
Failure to collaborate with regulatory authorities during audits or reviews associated with the ESR is also considered an offense. This may contain;
- Not giving the demanded documentation
- Hindering the scrutiny process
Penalty
Entities that fail to cooperate with regulatory authorities during audits will face a penalty of up to AED 50,000.
What are the steps to ensure compliance with Economic Substance Regulations?
The steps to ensure compliance with Economic Substance Regulations are;
- The primary step is to identify Relevant Activities. Validate if your business is engaged in any activities covered by ESR.
- The next step is to submit Notifications. Make sure to file ESR notifications on time with correct and precise information.
- After that, you have to prepare Annual Reports. Ensure that you are submitting comprehensive ESR reports annually.
- Fulfilling the ESR Requirements is mandatory. Make sure to have suitable local expenses, staff, and physical presence so you can fulfill the core income-generating activity (CIGA) standards.
- You must keep all-inclusive documentation that has to support your economic substance claims.
- Regularly conduct evaluation compliance status and fix any lacks.
- It is important to cooperate with regulatory bodies during any inspections and audits in any case.
Conclusion
Fulfilling all the compliance requirements of UAE’s economic substance regulations is fundamental so you can avoid any offenses and their relevant penalties. UAE is a modest land of corporate and the laws may change as per the needs. It is recommended to get assistance from top firms such as ESR consultants. Their proficient team is well capable of handling all the problems and issues related to Economic Substance Regulations. Their deep knowledge of ESR can help you avoid hefty penalties and give you a smooth path to flourish in the competitive UAE market.
