As the deadline for filing Economic Substance Regulations (ESR) reports for the financial year ending December 2023 approaches, it’s crucial for UAE businesses to act promptly. The final date for submission is June 30, 2024, and failing to meet this deadline could result in significant penalties, including a hefty fine of AED 20,000.
Understanding the Importance of ESR Compliance
The ESR framework was introduced to ensure that UAE entities undertaking certain activities are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE. This initiative aligns with international standards and helps prevent harmful tax practices.
Who Needs to File ESR Reports?
Entities that engage in any of the following Relevant Activities are required to file an ESR notification and, if they earn income from these activities, a substance report:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Distribution and Service Centre Business
Key Steps to Ensure Compliance
- Determine Your Obligations: Assess whether your business falls under the scope of ESR regulations. If your entity conducts one or more of the Relevant Activities, you are required to comply with the ESR requirements.
- Prepare Your Documentation: Gather all necessary documentation and information required to complete your ESR notification and report. This includes financial statements, details of business activities, and information about employees and physical assets.
- Submit Your ESR Notification: Submit the ESR notification to the relevant regulatory authority. This step must be completed even if your business does not earn income from the Relevant Activities.
- File the ESR Report: If your business earns income from the Relevant Activities, you must file an ESR report demonstrating economic substance in the UAE. This report should provide evidence that your business meets the substance requirements.
Penalties under the Economic Substance Regulations
Type of Offence | Amount of Penalty |
Failure to submit the ESR Notification | AED 20,000 |
Failure to submit the ESR Report | AED 50,000. |
Failure to provide accurate or complete information | AED 50,000 |
When an entity fails to meet the Economic Substance Test | 1st year – AED 50,000 – Information exchange with foreign competent authorities 2nd consecutive year – AED 400,000 – Information exchange with foreign competent authorities – Suspension, cancellation or non- renewal of trade license |
Consequences of Non-Compliance
Failure to comply with ESR requirements can result in severe penalties. The initial penalty for late submission is AED 20,000. Continuous non-compliance may lead to even harsher consequences, including increased fines and potential business license suspensions.
ESR Filing Deadline as per the Financial Year
Financial Year | Ending Dec 2023 | Ending March 2024 |
Notification Due Date | 30 June 2024 | 30 Sep 2024 |
Report Filing Due Date | 31 December 2024 | 31 March 2025 |
With the June 30, 2024 deadline fast approaching, it’s essential for businesses to take immediate action to ensure ESR compliance. Avoiding the AED 20,000 penalty is just one aspect; maintaining a good standing with regulatory authorities is crucial for your business’s reputation and ongoing operations in the UAE.
For professional assistance with your ESR filing, consider consulting with experts who can guide you through the process and ensure all requirements are met. At JP Global, we specialize in helping businesses navigate the complexities of ESR compliance, ensuring peace of mind and regulatory adherence.
