ESR compliance: audits on the way – is your structure ready?
Economic Substance Regulations (ESR) were introduced in the UAE in 2019 to ensure compliance with international tax standards and increase transparency in the country’s business practices.
All permanent establishments – companies, foundations – registered in the UAE are subject to the regulations, which implies reporting obligations as well as ongoing Compliance.
What’s changed?
On June 30, 2021, the UAE Ministry of Finance (MoF) released updated guidelines regarding ESR reporting, aiming to enhance clarity and scope. The most significant updates were:
Broadened scope of activities: The definition of “relevant activities” under the ESR was extended to include intellectual property holding, high-risk intellectual property development, and distribution and service centre activities.
ESR report templates: To streamline reporting and submission, the MoF has rolled out standardized ESR report templates.
Enhanced disclosure obligations: Companies are now mandated to furnish more comprehensive details on their operations, encompassing employee numbers, equipment specifics, and asset locations.
Increased penalties for offending companies: Penalties for late or non-compliance under the ESR have been heightened, with fines up to AED 50,000 for a one-time offense or AED 400,000 (repeat offence). Failure to comply can also result in business licenses being revoked.
Audit on the way – is your structure ready?
Adherence and compliance to regulations has been monitored via spot audits since shortly after the introduction of the ESR. The frequency of these audits has substantially increased in 2023.
An ESR audit follows a structured process. Typically, an entity will receive an email as notice that it is under audit by the National Assessing Authority (NAA). This process will involve a detailed review of relevant financial records, operational activities, and your corporate structure. The targeted entity will receive a list of documents to be provided.
The NAA conducts thorough examinations to verify that the audited entity is conducting core income-generating activities (CIGAs) within the country, maintaining adequate resources and premises, and adhering to economic substance regulations. Throughout the audit, a focus is placed on evaluating the authenticity and effectiveness of a company’s operations to ensure alignment with the regulatory framework established by the UAE government.
Sound simple? It is not: the authorities generally request between 24 and 34 documents for each audit, only providing a 5-day window for submission of a complete pack.
Ensuring readiness before the audit request arrives is essential!
Prepare, prepare, prepare!
Reliance on adequate expertise to support with an ESR compliance audit is key, whether such expertise is in-house or outsourced. If you leave it until the audit notice arrives, then it is probably too late, and the exercise will inevitably disturb business operations.
To avoid unnecessary penalties, planning and stress testing is key. Some considerations:
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- Review of Business Activities
- Economic Substance Test
- Maintenance of Records
- Filing of an Annual Notification
- Submission of ESR Report
- Continuous Monitoring
How we can help
Partnering with experienced professionals like M/HQ will help maintain robust internal processes which are key to navigating the complexities of ESR effectively. We take the headache of these compliances away from you and your team, allowing you to fully focus on doing what you do best!
Our experienced corporate secretarial services team (css@m-hq.com) is one phone call away if you would like to learn more.
Hermione Harrison
Director & Head of Corporate Governance
harrison@m-hq.com
+971 4 295 57 37
Marcia Rocha
Associate Director – Corporate Secretarial Services
rocha@m-hq.com
+971 50 340 4274
Calum Dart
Head – Corporate Services
dart@m-hq.com
+971 58 162 2131
Who we are
M/HQ is a platform catering to successful individuals and entrepreneurial families. Our one- stop-shop offering is unique in the Middle East: a holistic and cross-disciplinary combination of a market- leading corporate services firm, a private client specialist team and a regulatory & compliance services practice, all through one single platform.
We have extensive experience advising on a broad range of wealth structuring and legacy planning issues. We particularly assist in establishing and servicing Family- and Group- Holdings, Single- and Multi- Family offices, Foundations and other asset consolidation/protection and intergenerational wealth management structures.
Headquartered in the UAE, we are an entrepreneurial firm for entrepreneurial clients.
