Penalties for Non-Compliance with Economic Substance Regulations

Economic Substance regulations were introduced in the UAE to deliver greater transparency in taxation matters & also to guarantee that there is a healthy & fair tax competition in the nation. The regulations will ensure that the business substances in the UAE report the right measure of benefits picked up by the said financial movement directed by them. The organizations in the United Arab Emirates that fall within the scope of the ESR are needed to show monetary presence according to the level and sort of substantial economic activities they do. To keep up economic presence the organization needs to meet the Economic Substance Test by acquiring pay from CIGAs (Core Income Generating Activities), being coordinated and overseen in the UAE, and having sufficient workers, incur expenditure & premises.

Even so, the big question is what will happen if a Licensee fails to meet the Economic Substance Test. The Economic Substance Test is considered as a litmus test for the organizations to show that their business aims are authentic and they are not leading any harmful tax practices. Subsequently, penalties will be imposed by the relevant regulatory authority on businesses for failing the economic substance test.

Recently, The UAE Cabinet of Ministers has now canceled the original resolution from 2019 & issued an updated resolution through Cabinet Resolution No. 57 of 2020, which is the new ESR. Additional guidance for the New ESR was subsequently given through Ministerial Decision No.100 of 2020 from the UAE Ministry of Finance, which replaces the past Decision No. 215 of 2019, and incorporates a refreshed Relevant Activities Guide attached as an appendix. So, with the New ESR, the penalties have been increased, including the administrative penalties for non-compliance.  

As per Article 6 of Resolution, a licensee must meet all the prerequisites of the Economic Substance Test. In case the criteria’s set in the resolution isn't met, then the accompanying punishments are taken on the business:

• > If a company fails to submit a notification a penalty of AED 20,000 shall be imposed on the business.
• > If the company management fails to give accurate information about the organization, then a penalty of AED 50,000 will be charged to the business.
• > If the company fails to show an adequate amount of Economic substance or fails to show any Economic Substance then the accompanying penalties will be levied upon the business:

1. Penalty for the first year

• > A Penalty of AED 50,000   
• > Exchange of the information with a foreign Competent Authority of 

1. The Parent Company
2. The Ultimate Parent Company
3. The Ultimate Beneficial Owner

2. Penalty for the second year

• > A penalty of AED 40,0000 
• > Exchange of the information with a foreign Competent Authority

1. Of the Parent Company
2. Of the ultimate Parent Company
3. Of the ultimate Beneficial Owner  

• > The commercial license of the company can be suspended, withdrawn, or not renewed.

If a company fails to meet the Economic Substance Test has the right to appeal the penalty decision of the relevant regulatory authorities. The appeal can be moved in on any of the following grounds:

• > A company can appeal that the liability to the penalty doesn’t arise.
• > Can move an appeal against the amount of penalty.

Your Next Steps

As above mentioned, to avoid such penalties for violating the Economic Substance Regulations you should have to take the help of a professional audit firm in UAE. The Economic Substance Regulations in UAE are introduced to ensure that the economy of the nation is in line with the international standards and to limit harmful tax practices. So, to comply with the ESR, all companies will be tested to guarantee they are keeping a satisfactory economic substance concerning the relevant activities they carry out in the United Arab Emirates. Any failure to meet the Economic Substance Test will lead to penalties & actions.

How Can ARC Associates Help You?

Being the most promising Economic Substance Consultants in Dubai, Sharjah, Abu Dhabi & all over the UAE, our immense experience and the dedicated advisory team can help your business to take the required measures and support you in compliance with the regulatory framework. As we comprehend that there is a big need for understanding the ESR requirements and compiling to its requirements are essential for the smooth running of your business. It is preferred that the businesses avail the services of a business consultant like ARC Associates which will not only assist in all the matters relating to Economic Substance Regulations in Dubai - UAE but will also help in the daily financial activities of the business.

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