What Sharjah Entities Need To Know About The Economic Substance Regulations

Suppose you are doing business in the UAE or are considering starting a business there. In that case, you must understand the UAE Economic Substance Regulations requirements and take steps to ensure your company is compliant.

Noncompliance with the regulations can result in financial penalties or other sanctions, so it is important to be aware of your obligations under the law.

What UAE Entities Need to Know About The Economic Substance Regulations? The UAE Economic Substance Regulations were first time introduced in April 2019 and came into effect on 1 January 2020.

The regulations require companies to have a good physical presence in the UAE and engage in substantial economic activity there.

In addition, companies must provide a detailed report on their compliance with the regulations to the UAE authorities annually. 

Take Note Of A Few Key Requirements Under ESR. 

The UAE Economic Substance Regulations apply to all companies operating in the country, regardless of whether they are established in the UAE or are foreign-owned. The regulations cover a range of business activities, including banking, insurance, investment funds, leasing, headquarters, shipping, and intellectual property.

  1. Understand the UAE Economic Substance Regulations
  2. Make sure your company meets the requirements and consider an economic substance in the UAE
  3. Prepare and submit an annual compliance report to the UAE authorities
  4. Maintain records of all activities that contribute to your company’s economic substance in the UAE
  5. Cooperate with any audits or requests for information from the UAE authorities relating to your company’s economic substance in the UAE.

If your company is found in a non-compliant state with the UAE Economic Substance Regulations. You are going to count as subject to financial penalties or other sanctions. Therefore, you must take the time and understand the regulations and make sure your company complies.

The UAE Economic Substance Regulations are designed to ensure that companies operating in the UAE have a sufficient economic presence. The regulations require companies that have a good physical presence in the UAE and engage in substantial economic activity there.

In addition, companies provide a detailed report on their compliance with the regulations to the UAE authorities annually.

Sharjah Entities Need To Take Note Of A Few Key Requirements Under ESR:

  1. Maintaining an adequate physical presence in the UAE, which includes having an office, warehouse, or any other physical location from which the business is conducted;
  2. Engaging in substantial economic activity in the UAE and measuring by taking into account factors such as turnover, expenses, number of employees and assets located in the UAE; and
  3. An annual report on their compliance with the ESR to the UAE authorities.

Sharjah entities that are non-compliant with the ESR is a subject to financial penalties or other sanctions. Therefore, companies are taking out the time to understand the ESR requirements and ensure they comply.

1. Understand The UAE Economic Substance Regulations

The UAE Economic Substance Regulations apply to all companies operating in the country, regardless of whether they are established in the UAE or are foreign-owned. The regulations cover a range of business activities, including banking, insurance, investment funds, leasing, headquarters, shipping, and intellectual property.

2. Make Sure Your Company Meets The Requirements For Being Considered As Having Economic Substance In The UAE

The UAE Economic Substance Regulations require companies to have a good physical presence in the UAE and engage in substantial economic activity there. In addition, companies provide a detailed report on their compliance with the regulations to the UAE authorities annually.

3. Prepare And Submit An Annual Compliance Report To The UAE Authorities

Companies are all required to relent with the UAE Economic Substance Regulations. They all must prepare and submit an annual compliance report to the UAE authorities. The report must include information on the company’s activities in the UAE and its compliance with substance requirements.

4. Maintain Records Of All Activities That Contribute To Your Company’s Economic Substance In The UAE

Companies that comply with the UAE Economic Substance Regulations must maintain records of all activities contributing to their company’s economic substance in the UAE. These records are kept for five years and also made available to the UAE authorities upon request.

5. Cooperate With Any Audits Or Requests For Information From The UAE Authorities Relating To Your Company’s Economic Substance In The UAE

If your company selecting for an audit by the UAE authorities, you must promptly cooperate with the audit. And also provide all the information. Failure to do so may result in financial penalties or other sanctions.

The UAE Economic Substance Regulations are all designed to ensure that companies operating in the UAE have a sufficient economic presence. The regulations require companies and encourage a good physical presence in the UAE and engage in substantial economic activity there. In addition, companies provide a detailed report on their compliance with the regulations to the UAE authorities annually.

Complying with the UAE Economic Substance Regulations is important for companies in the UAE. These regulations ensure that businesses have a sufficient economic presence in the country and contribute to the UAE economy. Companies that fail to comply are subject to financial penalties or sanctions. Therefore, first, take the time to understand the ESR and ensure your company complies.

The key aim of the ESR is to ensure that profits attributable to an entity’s activities in the UAE are commensurate with the economic activity undertaken in the UAE.

To this end, the ESR requires a “Relevant Entity” conducting any of the “Relevant Activities” to demonstrate compliance with certain economic substance requirements.

The UAE introduce the Economic Substance Regulations (ESR) to ensure that entities carrying out certain activities generate economic substance within the UAE. The ESR will apply to all entities registered in any of the UAE’s free zones or onshore from 1 January 2019.

Under the ESR, an entity will also go to require and demonstrates sufficient economic substances in the whole UAE concerning each relevant activity it carries out. An entity will not comply with the ESR if it fails to do so.

The ESR sets out four key requirements for entities to meet and demonstrate sufficient economic sense:

1. The Entity Must Be Directly Engaged in Carrying Out One or More Relevant Activities;

2. The Entity Must Incur Expenditure concerning Carrying Out Those Activities;

3. The Entity Must Generate Income From Carrying Out Those Activities; 

4. The Entity Must Have an Appropriate Physical Presence in the UAE.

A Relevant Activity is an activity that falls within one of the following categories:

  1. Banking
  2. Insurance
  3. Investment funds
  4. Leasehold properties
  5. Shipping
  6. Headquarters business
  7. Professional services business or Holding company business.

The ESR also requires Relevant Entities to prepare and submit an annual Economic Substance Report disclosing, among other things, information on the entity’s compliance with the economic substance requirements.

The ESR does not apply to entities wholly owned by a federal or local government body or an entity exempt from tax in the UAE.

The Ministry of Economy has issued a guidance document setting out the detailed requirements under the ESR. 

Penalties For Non-Compliance With The ESR Include:  

The UAE Economic Substance Regulations are created to ensure that companies operating in the UAE have a sufficient economic presence. The regulations require companies to have a good physical presence in the UAE and engage in substantial economic activity there.

In addition, companies provide a detailed report on their compliance with the regulations to the UAE authorities annually.

– A fine of AED 20,000; 

– A requirement to remedy the breach within a specified period; and 

– Public notification of the breach.

Wrapping It Up: 

Complying with the UAE Economic Substance Regulations is important for companies in the UAE. These regulations help to ensure that businesses have a sufficient economic presence in the country and contribute to the UAE economy. Companies that fail to comply with the ESR may be subject to financial penalties or other sanctions. Therefore, you must take the time to understand the requirements of the ESR and make sure your company complies.

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Tags: Economic Substance filing , Economic substance in accounting , Economic Substance UAE
Priya Singh

She is a Digital Marketer and specializes in SEO with over two years of experience. She brings her decade of experience to her current role where she is dedicated to educating & inspiring the world on how to become a better digital marketer.

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