Economic Substance Regulations 2020

The Economic Substance Regulations, better known as ESR guidelines, are a set of compliance requirements that certain companies in the UAE need to follow. The ESR process became a part of the Emirati compliance measures in 2019 by an order by the UAE Ministry. Hence, all companies who have licenses for Relevant Activities are eligible to follow these guidelines from 2019 onwards.

Recently, the UAE government released a new resolution that amended the initial standards. The most recent revisions will replace the prior rules, thus all qualified organisations must stay current on these changes. In this piece, we’ll look at how ESR consultants can help you maintain government compliance and how KGRN can help you do so.

The Economic Substance Regulations guidelines are a new type of compliance measure that the UAE implemented in 2019. The move for such a guideline was as a result of the UAE’s continued effort to better itself as a part of the Organisation for Economic Co-operation and Development. Following the EU’s assessment of the Emirati taxation system, the UAE brought out these guidelines to help with ensuring the highest standards for Base Erosion and Profit Shifting.

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As per the Economic Substance Regulations guidelines, the companies that engage in Relevant Activities as mentioned below will have to clear an Economic Substance Test successfully. Hence, such companies must do the following;

1. Firstly, analyze their core income-generating activities
2. Secondly, be as well-directed and managed as possible
3. Thirdly, the Licensee’s activities must have adequate local Economic Substance, which mainly consists of;

1. If the company qualifies and meets the ES test, they must then notify the appropriate Regulatory Authority depending on where their office is situated.
2. They will also have to file an Economic Substance Return within 12 months before the end of the fiscal year.

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Here’s a look at the activities that come under the tag of Relevant Activities in the UAE;

1. Banking
2. Insurance
3. Investment Fund management
4. Distribution and Service Centre
5. Lease – Finance
6. Headquarters
7. Shipping
8. Holding Company
9. Intellectual property Business

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So, what exactly did the Amended Regulations change? Here’s a quick look at the most critical updates that were a part of the Amendment.

1. Firstly, a change in the definition of the term licensee
2. Secondly, a need for compulsory re-notification through the MOF portal
3. Thirdly, the Federal Tax Authority became the National Assessing Authority
4. Furthermore, the National Assessing Authority will have the power to oversee ESR compliance and regulation
5. Also, there are changes in Exemption rules for ESR-compliance 
6. Changes in the definition of a distribution and service centre business
7. Lastly, more clarity on what the terms Branches and Connected Person means

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Here is a look at the administrative penalties that companies will have to face if they do not meet the required compliance measures as per the Amended Regulations;

Now that you know about the Economic Substance Regulations guidelines and why they are essential let us take a quick look at how an ESR Consultancy firm like KGRN can help you. KGRN Chartered Accountants is one of UAE’s most prominent and well-known business consultancy and audit firms. Also, our team of experts have enough knowledge and expertise to help you gain a clear understanding of how ESR guidelines work.

They are well-versed with the new amendment, and continuously keep themselves updated regarding changes in rules. Hence, these experts will be able to guide you with maintaining compliance and ensuring you stay free of legal hassles.

Furthermore, KGRN’s chartered accountants will conduct an impact analysis that takes into account the ESR requirements as well as your company operations to ensure perfect compliance. In addition, our team can assist with error correction, rectification, and the submission of needed ESR returns.

As a consequence, we will be able to discover all of the weaknesses in your current system and assist you in developing a more efficient and compliant one. As a result, work with us at KGRN Chartered Accountants to stay ahead of the competition and on the correct track to success.

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