The ESR is an important component of the UAE’s business regulations and sits within a cross-border international tax framework.  The ESR was first issued in April 2019 and finally implemented after a series of amendments and guidance with the first batch of filings on 31 December 2020.

Businesses with a financial year of 31 March 2021 are reminded that the due date for the ESR reporting is 31 March 2022 if they performed a Relevant Activity during the financial year. The ESR report is required if the business is earning income from the Relevant activity reported and is not eligible to claim an exemption under ESR.

Filing deadlines have been recently extended. ESR notification and reporting are two separate filings and is an annual obligation for licensees within the scope of ESR. Failure to complete and submit the Notification may result in penalties as per ESR laws. That would attract penalties ranging from AED 20,000- AED 400,000. Considering this is the second year of filing, the higher penalty of AED 400,000 shall apply for a delay in filing the ESR report if the business was not compliant in the previous year.

The ESR law mandates that the companies in the UAE need to have an adequate economic substance in the UAE in relation to the following 9 relevant activities

  • Banking Businesses
  • Insurance Businesses
  • Investment Fund Management Businesses
  • Lease-Finance Businesses
  • Headquarters Businesses
  • Shipping Businesses
  • Holding Company Businesses
  • Intellectual Property Businesses
  • Distribution and Service Centre Businesses (Purchasing from Foreign connected persons/ Providing services to Foreign connected persons)

Following are the due dates for the Company having a financial year as below:

 

Financial Year Ending On Notification Due Date Return Due Date
31st Mar 2021 30th Sep 2021 31st Mar 2022
30th Sep 2021 31st Mar 2022 30th Sep 2022

 

Please note penalties for non-compliance would attract:

Non-Compliance Amended Penalty Amount AED
Failure to submit a Notification 20,000
Failure to submit an Economic Substance Report 50,000
Providing inaccurate information 50,000
Failure to pass ES Test for first year 50,000
Failure to pass ES Test for the consecutive year 400,000

 

If you have missed filing the ESR notification on time, we recommend that the notification should be filed at the earliest to avoid any delay in ESR reporting. Businesses should file as soon as possible and not wait until the end of the extended deadline to avoid any kind of penalty. Also, the filing should be done accurately.

Given the international nature of ESR, and the possibility of UAE authorities having to convey the company’s UAE Substance test failure to tax authorities overseas, the penalties are not limited inside the UAE alone but could also affect the company overseas as well.

At Hallmark, we have a team of experts to guide you through the entire process of ESR filing. So, whether your deadline is approaching, or you need to learn more about ESR, get in touch with us.

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