With the institution of Cabinet Resolution No. 57 of 2020, the Economic Substance Regulation (ESR) in the UAE has become a dynamic compliance obligation for businesses. Under this resolution, administrative penalties have been established to report violations related to ESR.
Licensees and Exempted Licensees must now follow strict guidelines to avoid penalties. Some key violations include;
- Providing wrong information
- Failure to submit ESR notification and ESR Reports
- Non-compliance with the Economic Substance Test
These penalties attend as an unambiguous reminder for businesses to seek professional guidance from expert ESR consultants in the UAE, confirming accurate reporting and compliance with ESR requirements.
The key requirement of ESR Compliance
Meeting the compulsions of the Economic Substance Regulation in the UAE involves understanding and fulfilling key requirements. Compliance with ESR requires careful attention to the necessary elements outlined by the regulation.
One key aspect is the identification and performance of extensive activities within the jurisdiction. Businesses must involve in activities that align with their primary income-generating activities, confirming economic substance is demonstrated within the UAE. Also, organizations need to keep adequate physical presence such as;
- Office Premises
- Employees
- Tangible Assets
These should be apt with the nature of their operations. It is important to keep detailed records of these activities and keep them within the UAE. Following these requirements and thoroughly assessing and addressing core income-generating activities will contribute to operative ESR compliance, lessen the risk of penalties, and ensure adherence to regulatory standards.
ESR Administrative Penalties
Here is a list of Administrative penalties for Economic Substance Regulation non-compliance in Dubai;
1- Economic Substance Penalty of Overlooking to Submit a Notification
Non-compliance with ESR notification submission in the UAE can effect an administrative Economic Substance penalty of AED 20,000 for Licensees or exempted licensees. As it is specified in Article 13 of Cabinet Resolution No. 57 of 2020.
The entity’s failure to submit the ESR notification activates the penalty, which is resolute by the National Assessing Authority. Upon validation of the violation, the authority quickly notifies the entity about the imposed penalty, highlighting the importance of obeying the ESR notification requirement.
2- Economic Substance Penalty of Overlooking to Submit an Economic Substance Report
Failure to submit the Economic Substance Report and essential information or documentation may effect in an administrative Economic Substance penalty of AED 50,000 in accordance with Cabinet Resolution No. 57 of 2020 as stated in Article 14. Entities are obligated to fulfill these reporting requirements to comply with the Economic Substance Requirements.
In case the same violation occurs in the successive Financial Year, resulting in the first offense, a higher penalty of AED 400,000, as per Article 14, will be executed. It is imperative to note that repeated violations lead to augmented financial repercussions in the form of penalties.
To navigate these difficulties and minimize penalties, it is prudent to consult with top ESR consultants in Dubai such as Farahat and Co., who can provide proficient guidance on ensuring compliance with the Economic Substance Regulations.
3- Economic Substance Penalty of Failing Short on the Economic Substance Test
In the UAE, businesses involved in Relevant Activities must accomplish the Economic Substance Test to ensure compliance. Falling short of meeting this test for each financial year brings concerns, as outlined in Article 14 of Cabinet Resolution No. 57 of 2020. For the first year of non-compliance, a penalty of AED 50,000 will be executed.
Though, it is important to note that recurrent violations in subsequent Financial Years entail an expressively higher administrative Economic Substance penalty of AED 400,000, as specified in Article 14 of the same resolution.
4- Economic Substance Penalty of Filling Wrong Information
Licensees and exempted licensees must ensure the delivery of accurate information and apt documentation to the Regulatory Authority. Failure to do so, along with a lack of revelation regarding known inexactitudes, will result in an Economic Substance penalty of AED 50,000, as outlined in Article 15 of Cabinet Resolution No. 57 of 2020. Upon recognizing such violations, the National Assessing Authority promptly informs the entities regarding the imposed penalty.
Correct reporting and clear communication with the Regulatory Authority are important for businesses in the UAE to sustain compliance with regulatory requirements. Filing indecent information or cover-up knowledge of errors can lead to financial penalties and potential reputational damage. So, it is essential for Licensees and exempted licensees to prioritize the accuracy and truthfulness of their submitted information.
What are the Content of Penalty Notification?
When a Licensee or Exempted Licensee is found to have disrupted an ESR law, the National Assessing Authority will issue a notice to the lawbreakers. The Authority provides the following essential information to the violators regarding the Economic Substance Penalty;
1- Verification of the violation committed by the Licensee or Exempted Licensee in the relevant financial year, as resolute by the National Assessing Authority.
2- Explanation of the details behind imposing the ESR administrative penalty.
3- Description of the monetary amount of the administrative fine executed on the organization.
4- The beginning date of the administrative penalty, which is scheduled not less than 30 working days after the issuance of the notice.
5- The opportunity to trial the administrative penalty.
Licensees and Exempted Licensees have the right to request the administrative Economic Substance penalty executed by the National Assessing Authority in keeping with Article 17 of Cabinet Resolution 57 of 2020.
Conclusion
To evade the Administrative Economic Substance Penalty, businesses must obey the UAE’s Economic Substance Regulations (ESR). Correct reporting and obedience to ESR requirements are fundamental to minimizing penalties. Consulting top experts like Economic Substance Regulations confirms guidance on navigating the complexities of Economic Substance Regulations. Prioritizing compliance and looking for professional assistance protects operations and contributes to a prosperous business environment in the UAE.