The companies in the UAE irrespective of jurisdictions are now faced with the responsibility of assessing whether they come under the scope of the UAE Economic Substance Regulations (ESR). As per the regulations, the companies that conduct the relevant activities in the UAE are required to have adequate economic substance in the UAE in relation to the activities. Being a mandatory requirement, the free zones including Ras Al Khaimah Economic Zone (RAKEZ) have introduced ESR guidelines and issued the deadline for filing UAE ESR notification as 30 June 2020. This article attempts to delve deep into some specific questions related to ‘Applicability of ESR in RAKEZ’ and ‘what makes companies eligible for ESR in UAE’.
What is Economic Substance Regulations in UAE?
The ESR in UAE has been introduced on 30 April 2019 pursuant to Cabinet of Ministers Resolution No. 31 of 2019. The Ministry of Finance followed it up by issuing guidance on 11 September 2019 that provided further clarification on ESR in UAE. As per the ESR guidance, the companies that carry out one or more relevant activities are required to have an adequate economic presence in the UAE in the activities they undertake. The Relevant Activities as per the UAE ESR are listed below,
- Banking Business
- Insurance Business
- Investment and Wealth Management
- Lease-Finance
- Shipping
- Holding Company
- Intellectual Property (IP)
- Distribution and Service Centre Business
Also read: What are the Relevant Activities Under Economic Substance Regulations in the UAE?
Applicability of Economic Substance Regulation on RAKEZ Companies
The companies, partnerships, foundations, or branches of foreign companies that conduct the relevant activities come under the scope of ESR in RAKEZ. Such entities must be
- Registered with RAKEZ
- Generate income from one or more relevant activities
- Having financial year commencing on or after 1 January 2019
Also read: ESR Compliance: 5 Requirements for the UAE Economic Substance Test
Annual Economic Substance Notification for RAKEZ Companies
The companies in RAKEZ are required to file an annual ESR notification to the RAKEZ Authority. The notification for ESR in RAKEZ is a self-declaration that whether or not the company is carrying out any relevant activities in the UAE. The ESR notification should contain details like
- Whether the company conducts the relevant activity
- Whether the company’s earnings from any of the relevant activity is being taxed outside the UAE
- Date of the financial year-end
Filing an annual notification for ESR in RAKEZ requires professional assistance to avoid the possibility of errors. The companies need to consult the best ESR service providers in UAE to file the annual notification properly.
Filing of Economic Substance Notification for RAKEZ Companies
The companies licensed by RAKEZ that earns income from one or more relevant activities are required to
- Meet the ESR Requirement in UAE
- File ESR Return to the RAKEZ Registration Authority
Also read: How to File Economic Substance Notification in the UAE
The ESR Return should be filed within 12 months of the end of the company’s financial year-end. The companies that carry out a relevant activity but do not generate any income out of it are not required to file the annual ESR Return. The companies that are exempt from ESR in UAE are also not required to file the ESR Return.
The ESR Return should contain details like economic activity, income, expenses, and assets. The companies that are part of a corporate group should file separate ESR Returns as consolidated ESR Reporting is not valid. The best ESR service providers in UAE provide the proper guidance for the companies to comply with ESR return requirements.
Penalties for Failing to Comply with Economic Substance Regulations in RAKEZ
The UAE ESR is a mandatory requirement that covers the companies in the mainland, free zone, and offshore jurisdictions. Failing to comply with the ESR in UAE will attract heavy penalties from the Ministry of Economy. The companies that fail to file the ESR notification in UAE will have to pay a penalty in the range of AED 10,000-50,000. Penalties in the same range will be imposed if the companies furnish incorrect or incomplete information.
Why Choose Jitendra Chartered Accountants?
The companies in RAKEZ are mandatorily required to comply with the UAE ESR requirements to ensure that they are not indulging in harmful tax practices. As part of meeting the ESR requirements in UAE, the RAKEZ companies that are conducting the relevant activities must file the UAE ESR notification on or before the due date, and file the annual ESR Return. The failure to comply with ESR in UAE will lead to penalties and to avoid such heavy fines the companies should avail the services of professional ESR service providers in UAE like Jitendra Chartered Accountants (JCA). JCA provides efficient ESR Services in UAE including
- Helping the companies file ESR Notification in UAE as per the requirements
- Drafting the ESR Returns and filing it to the regulatory authority
- Provide recommendations if the companies fail to meet the ESR Test in UAE