The UAE’s commendable pursuit to bring more transparency and efficiency to its economy is earning praises as the country introduced the Economic Substance Regulations, which requires the free zone, mainland and offshore companies to prove adequate economic presence in the relevant economic activities. The ESR in UAE is applicable to companies licensed by the free zones and offshore and also the mainland companies that conduct the relevant activities in the UAE.
In line with this requirement, both offshore and free zone companies licensed by the Jebel Ali Free Zone should file an ESR notification before 30th June 2020. JAFZA mandates that the companies that conduct the relevant activities must file the notification or face penalties as per the ESR in UAE.
Also read: UAE Economic Substance Notification Deadline for Free Zones & Mainland Companies
Background of Economic Substance Regulations in UAE
The UAE introduced ESR to honour its commitment towards the OECD as a valuable member of the organization and also in response to a review conducted by the EU on the UAE’s tax framework. As a result, the mainland, free zone, and offshore companies that conduct the relevant activities are required to demonstrate adequate economic presence in the country relative to the activities.
Economic Substance Regulations in JAFZA: Who Should File the Notification?
The companies that conduct the following relevant activities as per ESR in UAE should file an annual notification to the regulatory authority (JAFZA is the regulatory authority in this case):
- Banking
- Insurance
- Investment Fund Management Business
- Lease-Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Activity
- Intellectual Property Business
- Distribution and Service Centre Business
Also read: What are the Relevant Activities Under Economic Substance Regulations in the UAE?
How to File Annual Notification for Economic Substance Regulations in JAFZA?
The companies are required to notify the JAFZA about the activities it carries out in the UAE and the ESR notification filing is a prerequisite for filing the UAE Economic Substance Return. Before filing the JAFZA ESR notification, the companies must self-assess whether they conduct the relevant activity. If the businesses conduct the relevant activities, they should file notify the JAFZA that they are carrying out the activities in the UAE. As per the regulations, a substance over form approach must be taken while filing the JAFZA ESR notification. This means the companies need to look beyond the activities mentioned in their trade license while filing the JAFZA ESR notification. The JAFZA companies that come under the scope of ESR in UAE, should disclose,
- The Relevant activities they conduct in the UAE
- Whether the income generated from the activities are taxed outside the UAE
- The Financial year-end-date
For assessment of the relevant activities and to formally file the JAFZA ESR notification, the eligible companies can seek the professional assistance of ESR services in the UAE.
Can a company, being a part of a Corporate Group, file a Single Economic Substance Notification in JAFZA?
It is common for companies to be part of a corporate group for accounting purposes in the UAE. However, as per the UAE ESR rules, such companies that are part of a corporate group are not allowed to file a single ESR notification in UAE. The companies that are part of a group should file the JAFZA ESR notification separately.
Economic Substance Test Requirements in JAFZA
Once the annual UAE ESR notification has been filed and submitted to the JAFZA, the companies need to demonstrate they have an adequate economic presence in the activities they conduct in the UAE. This process is called the Economic Substance Regulations Test in UAE and the companies are required to demonstrate,
- The companies and the relevant activities are directed and managed in the UAE
- The Core Income Generating Activities are carried out in the UAE
- Having adequate employees, expenditure, and premises in the UAE
Penalties for Failing to File Economic Substance Notification in JAFZA
The companies that come under the scope of ESR in the UAE should file and submit the ESR notification to the regulatory authority. Failing to submit the ESR notification in UAE will attract heavy fines in the range of AED 10,000-50,000. The companies that are yet to get a clarification about whether they come under the scope of ESR should seek the professional assistance of ESR services in the UAE to avoid the penalties arising from non-compliance.
Penalties on Incorrect Information in the Economic Substance Notification in JAFZA
The companies that file the annual UAE ESR notification should ensure that they are filing correct and complete information. A JAFZA entity that files incorrect or incomplete information in the annual ESR notification in UAE would have to pay a fine to the tune of AED 10,000-50,000. If the regulatory authority comes to know that the JAFZA entity committed the error knowingly, then the authority considers that the company has failed the UAE ESR test.
Also read: ESR Compliance: 5 Requirements for the UAE Economic Substance Test
Why Choose Jitendra Chartered Accountants?
The companies licensed by the JAFZA that conduct the relevant activities are required to submit the UAE ESR notification before the prescribed deadline. The new compliance requirement has put the businessmen under pressure because assessing whether their company comes under the scope of ESR in UAE, has proven to be a tough task. A wrong assessment may lead the eligible companies to decide not to file the annual UAE ESR notification. Also, filing the ESR notification without professional help may lead to furnishing wrong or incomplete information. Both situations would attract heavy fines and the companies may also have to face the risk of failing the UAE ESR test. Situations like this demand the able guidance of a professional ESR Service provider like Jitendra Chartered Accountants (JCA). JCA has a highly qualified team of Chartered Accountants and business setup consultants who are well versed in the regulations regarding the UAE ESR. To comply with the requirements of ESR in JAFZA, the eligible companies should consult the JCA before the deadline. JCA offers services like
- Filing and submitting the UAE ESR notification to the Regulatory Authority
- Drafting and submitting the UAE ESR Return to the Regulatory Authority
- Suggesting recommendations to the companies if they fail to meet UAE Economic Substance Test