By reducing illegal financial practices, the UAE has consistently made laudable steps to streamline its economy in accordance with international standards. The Economic Substance Legislation (ESR) and the introduction of AML/CFT regulations are two significant examples of regulations adopted by the UAE to adhere to international standards. With the implementation of the ESR, businesses that carry out pertinent economic operations within the UAE are now charged with the duty of proving the economic content.
WHAT IS ECONOMIC SUBSTANCE REGULATION OR ESR?
The European Union has added the United Arab Emirates (UAE) to its list of non-cooperative tax jurisdictions as a result of concerns voiced by the European Commission. As a result, the UAE passed the Economic Substance Regulations (ESR) by way of Cabinet Decision No. 57 of 2020, which took effect on January 1, 2019.
ESR imposes the requirement that all UAE entities (including companies outside the country and branches of domestic and foreign businesses) who take part in and profit from any Relevant Activities maintain economic substance in the UAE that is particular to each Relevant Activity.
WHAT IS THE APPLICABILITY OF THE ECONOMIC SUBSTANCE REGULATION?
All individuals, both natural and legal, involved in relevant activities (RA) in the UAE, including those in free zones and free financial zones, are subject to the ESR. The Federal Government, the Government of any Emirate of the UAE, or any governmental authority or body of any of them, has at least 51% direct or indirect ownership of the shares, according to the interpretation of the ESR, and offshore firms are included in the Free Zone corporations.
Companies operating both onshore and in free zones that engage in any of the relevant activities listed below must comply with the UAE Economic Substance Regulations.
- Insurance Businesses
- Banking Businesses
- Lease-Finance Businesses
- Investment Fund Businesses
- Headquarters Businesses
- Shipping Businesses
- Intellectual Property Businesses
- Holding Company Businesses
- Distribution and Service Centers Businesses
WHAT IS DAFZA FREE ZONE IN UAE?
DAFZA, also referred to as the Dubai Airport Free zone Authority, is a free zone in Dubai. It was founded in 1996 and is situated close to Dubai International Airport. DAFZA was a component of the government’s strategy goal to create an investment-driven economy. The logistics and freight, information technology, aviation, telecommunications, engineering, food and beverage, jewelry, and cosmetics industries are all supported by this free economic zone in Dubai. More than 1,600 registered businesses and 15,000 professionals call it home, aiming to take advantage of business-friendly regulations and a variety of top-notch amenities.
ECONOMIC SUBSTANCE REGULATIONS IN DAFZA or DUBAI AIRPORT FREE ZONE AUTHORITY
The companies have struggled to have better understanding regarding the pertinent activities ever since the ESR requirement in the UAE was announced. Companies in DAFZA must determine for themselves if they are engaging in the necessary activities in the UAE. It is advised to carry out the assessment of relevant activities under the direction of the top ESR services in Dubai, United Arab Emirates.
HOW DOES THE FILING OF ANNUAL ECONOMIC SUBSTANCE REGULATIONS IN DAFZA WORK?
Companies in the UAE are obligated to inform the relevant regulatory authorities whether or not they are performing the relevant activity within the UAE, regardless of the extent of ESR. An annual filing and submission of the notification to the authority is required. According to the ESR standards, the enterprises with DAFZA licenses must notify the free zone administration. The DAFZA businesses must:
- Determine and report whether they are engaging in any significant economic activity.
- Indicate whether the income from the relevant activity is subject to taxation outside of the UAE.
- Record the date of the fiscal year’s conclusion
WHAT IS THE ESR TEST FOR DAFZA?
The DAFZA businesses must exhibit sufficient economic substance in significant activities in order to conduct the necessary activity in the UAE. The UAE’s economic substance test will evaluate if the businesses are:
- Executing the Core Income Generating Activity (CIGA) in the UAE
- Being governed and run from the UAE
- Consist a sufficient number of staff and financial and physical resources in the UAE to conduct the CIGA
The UAE considers the type of the activity and the amount of income received by the licensee to establish the appropriate economic substance because the businesses vary in size and kind. As a result, there is no minimum criteria for adequate or acceptable economic substance in the ESR guidance.
HOW DO COMPANIES MAKE ANNUAL ESR FILING REPORT IN DAFZA?
Within a year of the end of the fiscal year, enterprises with DAFZA licenses are required to submit an annual Economic Substance Report to the free zone authority. Details including economic activity, revenue, expenses, and assets are taken into account when creating the Economic Substance Report. The companies that are a part of a corporate group must file the report separately because the requirements do not permit aggregated group reporting.
WHAT ARE CONSEQUENCES FOR NON-COMPLIANCE WITH ECONOMIC SUBSTANCE REGULATIONS IN DAFZA FOR COMPANIES?
The companies will face costly fines and dire legal repercussions if they do not adhere to ESR in the UAE. A company will be fined between AED 10,000 and AED 50,000 if it fails to submit and file the yearly ESR notification. Companies that provide inaccurate or incomplete information will be penalized equally.
CONCLUSION
In order to ensure they are not abusing damaging tax methods, businesses under the UAE, including those in DAFZA, are required to adhere to the ESR. The three stages of the procedure that deals in compliance with ESR are receiving the ESR Notification conducting the ESR Test and preparing the ESR Report. The submission of notifications and reports requires close attention because mistakes could result in fines for the companies. Companies must collaborate with businesses that offer services related to ESR in the UAE if they want to prevent such unanticipated events.
