Economic Substance Regulation

ESR regulations in DMCC- Background to the Regulations

May 11, 2020 Comments Off on ESR regulations in DMCC- Background to the Regulations

On the 30th of April 2019, the UAE enacted the Economic Substance Regulation (ESR) by introducing the Cabinet Decision No. 31. According to this decision, economic substance requirements for the businesses which were carrying out “Relevant Business Activities” were provided. This decision was issued by the Ministry of Finance (MoF). Further updates were also later on provided, which helped the businesses by providing the necessary Guidance.

According to this regulation, every business in the United Arab Emirates which has been established and registered Onshore or in one of the Free-zones and perform the Relevant Activities must comply with the regulations related to Economic Substance in the UAE. The company must also notify the same and submit the ESR Return before 31st of December,2020.

The term “Relevant Activities comprise of activities such as:

  • Insurance Business
  • Banking Business
  • Headquarter Business
  • Shipping Business
  • Investment and Fund Management Business
  • Intellectual Property (IP) Business
  • Lease and finance Business
  • Distribution and Service Centre Business
  • Holding Company Business

The business entities which will come under the purview off the ESR Regulation need to submit a notification to the Concerned regulatory authority initially, and later ESR returns. The regulations will be applicable to the financial years which are starting from 1st of January 2019.

The regulations as mentioned above will not be applicable to any business entity in which either the Federal Government of the United Arab Emirates or The Government of any of the Emirates or any governmental authority has a direct or indirect share of 51% in their share capital.

Penalties

In case the business entity has not earned any income from the mentioned relevant activities in the financial period, it does not have to file for any economic substance declaration or any related tests. If the business entity meets the specified requirements but fails to comply with the regulations, then they will have to face administrative penalties which will include:

  1. Monetary fines and penalties.
  2.  Exchange of information with a Competent Foreign Authority (according to Article 1 of Regulations).
  3. Revocation, non-renewal or possible suspension of the business entity.

Background to the ESR Regulations

  • The Economic Substance Resolution (ESR) has been issued according to the global standard set by the Organization for Economic Cooperation and Development (OECD) Forum on Harmful Trade Practices. According to FHTP, a company should perform substantial business activities in a jurisdiction.
  • All the relevant activities which a company established in the UAE must follow have been mentioned in Article 4 of the Ministerial Decision no. 215. According to this decision, all the companies which have been registered and licenced in the UAE and carry out the mentioned relevant activities must follow the Economic Substance Regulations by fulfilling the necessary reporting requirements and satisfying the “Economic Substance Test”.
  • Dubai Multi Commodities Centre Authority (which is the Regulatory Authority in the DMCC Free zone) has been appointed as the regulatory authority for the applicable DMCC licensees with accordance to the Cabinet Resolution No. 58 of 2019.
  • From the year 2020, each of the licensed company will have to declare if they have conducted any activates which are mentioned as Relevant Activities in the previous financial year.

According to the regulations in the DMCC Free Zone, all the member companies must notify the regulatory authority annually if the company conducted the relevant activities or not in the previous financial year. This information should be provided with the latest by 30th of June,2020.

In the present scenario, every business is trying to save the maximum amount of funds for the future of the company. This is why it is recommended that they avail l the services of a Business Consultancy which will assist the businesses in the handling critical reporting requirements and thus avoid any potential penalties and fines.

Jaxa is one of the approved auditors in DMCC, and we can also assist in the submission of the ESR reports. One thing should always be kept in mind that only an approved auditor will be able to conduct accounting and auditing functions in the DMCC free zone. So it is better that DMCC companies take financial and related consultancy services from registered auditors in DMCC.

JAXA is a reputed auditor, business consultancy and accountancy service provided and has an experience of 13+ years in this field. It also has an ISO 9001:2015 certification which is an added bonus. The management availing the services of JAXA can be assured that the experts will always keep the best interest of your company in mind. To obtain more details about the services of JAXA Chartered Accountants, Contact Us. We will be happy to respond to all of your queries.