In the last few years, the UAE has taken several regulatory measures to conform with international standards and maintain transparency in its financial procedures. One of these regulations, namely Economic Substance Regulations in UAE, is of immense importance for operating enterprises in this region. It is essential to understand the Economic Substance Regulations in UAE and how they can keep your business compliant and operational at an optimum level.
Economic Substance Regulations
The Economic Substance Regulations in UAE (ESR) are a series of directives the UAE implemented to guarantee that entities executing certain activities have substantial presence and economic conduct in the country, rather than artificially only existing for beneficial tax purposes. Adopted, at least in part under international pressures calling for the transparency and equity of tax practices worldwide to counter base erosion & profit shifting (BEPS).
Provisions contained in Economic Substance Regulations
Economic Substance Requirements: Businesses undertaking relevant activities must demonstrate that they carry out core income-generating activities in the UAE. This might involve having an adequate number of staff, a physical site and enough running costs to be able to do the activity well.
Reporting compliance:
All ESR companies are required to submit an annual economic substance return to the jurisdiction. This can include a report setting out practical evidence of the extent to which it carries on business and meets economic substance requirements.
Nare further Recompense:
Defaulting upon ESRs may call for huge penalties. This is due to the loss of reputation but also because it can result in penalties which range up to a fine (based on their case-to-case basis) along with potential restrictions, legal or otherwise.
The documentation and follow up bookkeeping:
Requirements for an ESR-Undertakings in the UAE are obligated to maintain a comprehensive set of Documentary evidence that is able to establish compliance with the ESR. Such records include financial statements, operational data and proof of commercial activities conducted in the UAE.
How does ESR impact your Business?
More compliance burden:
Businesses will now have to spend time and resources in compliance with the economic materiality requirement. These include appropriate recordkeeping, a bricks-and-mortar location and level of operations. Other companies may need to reorganise operations or hire employees.
Repercussions of a financial nature:
OECD requires businesses to comply with ESR, which again leads you back here This, in turn may require companies to raise their operational costs where they must accommodate the heavy activity orders. Further, the costs incurred in maintaining correct records and filing returns may end up increasing that burden even mores.
Operational Adjustments:
Businesses may be required to make operational adjustments to conform with ESR. This might mean establishing physical facilities in the UAE, hiring employees locally or ramping up business activity to show that you have meaningful operations.
Conclusion
Economic Substance Regulations are an important part of the regulatory landscape in UAE to confirm that businesses involved in specific activities have adequate economic presence within the region. Knowing these rules and what they entail for your business allows you to stay on top of them, fine-tune your company accordingly and maintain a good name. Partnerships such as TSAC make the process of ESR that much easier and less complex for you to follow through with all necessary steps in order to run a successful business compliantly within the UAE.