How to Avoid Economic Substance Regulations (ESR) related penalties?

In the UAE, everyone has an equal opportunity to begin their own business or set up a branch of their mainland business, offshore or in a free zone space. The ESR or Economic Substance Regulations have to be followed by all companies. Except for a few exempt business types, ESR compliance is mandatory for every financial reporting period. For this reasons companies in UAE are required to take a self-assessment test to identify their relevant activities under the scope of ESR.

The first step to filing ESR is to identify the type of ESR reporting that applies to the company. Whether it is intellectual property, a holding company, headquarters, or lease financing, there are different types of categories where the ESR reporting framework is set up for the same. To determine the same, the companies past year financials are taken into consideration, and any changes in the relevant activity during the financial period need to be reported. The ESR reporting has to be done promptly; else it will only invite penalties and strict action by law. ESR consultants from Farahat and Co are experts in their field of work and can assist in companies self-assessment for filing ESR, helping you avoid unnecessary fines or ESR penalties.

What Steps Should a Company Take to Avoid ESR Related Penalties in UAE?

As mentioned above, the first step is always to identify the type of relevant activity of the company. A qualified accountant or even a chartered accountant can help you with the expert consultation on the various activities that form a relevant activity under the license name for the financial period. If a company defines its license activity with any following, they are liable to notify and file for ESR within the given deadline. Else, it is eligible for penalty. 

The Nine relevant activities are as follows:

  • Lease financing companies
  • Insurance companies
  • Shipping Business
  • Headquarter Business 
  • Intellectual Property Business
  • Holding Companies
  • Investment Fund Management Business
  • Distribution and Service Centre Business
  • Shipping Business

 Why is There a Need for ESR Filing in The UAE?

A licensee in the UAE has to take the ESR test, file the ESR notification, and ESR report to the National Assessing Authority to disclose their relevant activities is within or out of the scope of ESR’s core activities. If the company’s levant activity changes, they must notify the National Assessing Authority.

Below are The Penalties For Failing to Submit The ESR Notification and Report in UAE

  • The first penalty of AED 20,000/- is levied when the licensee fails to submit the notification.
  • Failure to submit an ESR report within the stipulated timeline is AED 50,000, and any financial data manipulated or is inaccurately mentioned further gathers a fine of AED 50,000
  • Depending on the company’s size, a fine of AED 10,000 to AED 50,000 gets further levied on companies who fail to take the ESR assessment test.
  • A penalty of not more than AED 400,000 gets levied on the licensee when a repeated offence of not reporting ESR in the next financial year after the notice was issued.
  • In cases where the licensee reported for ESR test but the relevant activities are not under the scope of ESR regulated activities, they have the right to appeal under Article 13 of Regulatory Authority resolutions.
  • Also, the Cabinet Resolution of 2020 has provisions for appealing against penalties due to ESR non-compliance.
  • After repeated penalties, the Regulatory Authority gave the right to revoke the license to conduct business any further until the corrections are cleared, and the ESR standards are met.

Why Select Farahat and Co to Assess your Economic Substance Regulations?

 Participating in the ESR reporting is not limited to a national level. But these reports are shared with overseas tax bodies and foreign authorities. Any failure, intentional or unintentional, will lead to a red flag marking by the Regulatory Authority. Therefore, ESR experts from Farahat and Co ensure that your company never misses the ESR reporting deadline. 

Suppose you have missed out on important dates or are facing an issue with ESR notification or reporting. ESR reporting experts from Farahat and Co ensure that your company is compliant and ESR consultation. In that case, they can assist you with corrective measures and bring your company right back on track to avoid any further penalties or warnings. 

Economic Substance Regulations will provide the relevant authorities with a solid audited financial when it comes to appealing your case. With one of the best accounting services in the UAE, Economic Substance Regulations completes an internal and external audit and provides you with a strategy for easy day to day operations and financial reporting of your firm. From accurately identifying your relevant activity to submitting notification and ESR reports, expert can help companies fight for the right to appeal. 

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