ESR Penalty Email from FTA in UAE
Have you received a penalty email from the Federal Tax Authority for failing to comply with the UAE’s Economic Substance Regulation? In this article, we will look at why penalties are imposed and how to deal with them.
Before we get into the reasons why you might have received the penalty, we’d like to draw your attention to the important due date in the ESR. One of the most serious non-compliances is late submission.
ESR Notification
Must be filed within 6 months of the end of the fiscal year (by licensee and exempted licensee conducting relevant activity).
ESR Report
Must be filed within 12 months of the end of the fiscal year (by licensee earning income from relevant activity)
Reasons for noncompliance & receipt of a penalty
1)The FY 2019 ESR Submissions (Notification &/or Report) were submitted in December 2020. Many organisations have followed the same pattern and assumed that the deadline for ESR submission was in December. As a result of that assumption, entities have ended up submitting their notification for FY 2020 on December 21 rather than June 21.
This has caused a delay in the submission of the Notification and has resulted in a penalty of AED 20,000. Due to a change in the Regulation, submission of FY 2019 in Dec2020 was delayed until Dec 20, and thus the deadline for FY 2019 submission was extended until Dec 20. However, beginning in fiscal 2020, the due date was as defined in the aforementioned regulation.
2)Entities submitted the notification well before the deadline, but did not submit the ESR report on time. This will result in a penalty of AED 50,000.
3)In FY 2019, entities incorrectly assessed the ESR’s applicability, and the same interpretation was used in FY 2020. In addition, there was a delay in submission, which resulted in a penalty from FTA.
4)FTA requested additional information, but the entity did not respond by the deadline.
5)The entity had submitted a Notification with the relevant activity marked as “No.” However, it was later discovered that the entity engages in relevant activity and a change was requested. However, because the amendment request was not approved by the reporting deadline, the Report is being submitted late. The ESR report tab will not be activated on the dashboard unless relevant activity and relevant income are notified in the notification. As a result, an amendment request is required.
The crucial point to remember
It is critical to evaluate the activities carried out by your company during the reporting period. The applicability of ESR is entirely dependent on the activities carried out by your company. Incorrect assessment can result in both monetary and non-monetary penalties.
What should your next step be if you are penalised? Licensees have the option to appeal the penalty and provide clarification to the authority.
Steps to File an Appeal:
1)Conduct a thorough examination of your company’s activities to determine whether they meet the definition of relevant activity as defined by the Economic Substance Regulation (Assess the actual activities carried during the reporting period and not only ones mentioned in your trade license)
2)Identify your ESR submission on the MoF portal.
3)If you encounter any of the following outcomes, you may file an appeal against the penalty:
- Although the entity is not engaged in Relevant Activity, it has still submitted a delayed notification:
On June 21st, for instance, notification was required to be given. However, because the submission for the fiscal year 2019 was finished in December 2020 (due date extension), you utilised the same strategy for the fiscal year 2020 because it was completed in December 2020. (This suggests that you are sending notification on the 21st of December). Given that the entity in question is not involved in Relevant activity according to the ESR’s definition, this is something that can be contested. As a result, the company is not required to submit the notification.
- Although the notification was submitted on time, the ESR report was not: – In such cases, first assess whether the activity qualifies as a relevant activity according to ESR. If you do not qualify for any relevant activity, you may file an appeal by providing sufficient supporting evidence.
- If relevant activity is carried out, it is necessary to determine whether the delay in submission was caused by a technical error on the portal, which resulted in the delay. Support for such cases can be presented to authorities during the appeal submission process. If the delay was caused by negligence, it is almost certainly the result of a mistake.
Please let us know if there are any other instances where the entity is penalised and you are citing our assistance in conducting an ESR applicability assessment on your business activities or seeking assistance in submitting an appeal to the FTA. You can contact us
