Assess your Economic Substance Regulations applicability with accuracy

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Sakina Dickenwala, director - legal services and Manoj Pandey, partner - direct taxation
Sakina Dickenwala, director - legal services and Manoj Pandey, partner - direct taxation

Expert guidance ensures all submissions are correct, thus avoiding unnecessary penalties.

By Sakina Dickenwala and Manoj Pandey

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Published: Mon 18 Jan 2021, 8:49 AM

Last updated: Mon 18 Jan 2021, 2:18 PM

As part of the UAE's commitment as a member of the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework, and in response to an assessment of the UAE's tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the "Regulations") on April 30, 2019.  With the first batch of filings in June 2020, the UAE's Economic Substance Regulations (ESR) was finally implemented after a series of amendments and guidance following its initial issue. The UAE Ministry of Finance (MoF) extended the filing deadline to January 31, 2021.   ESR filing requires the activity of a business as per the licence to match its financial statement and that activity determined in 'substance' rather than in form alone. The licensee must ensure that the filings are correct on both. A common error made by licensees is to overlook the ground reality of situs of management, employees, assets, underlying agreements, invoices, etc. and not read through the law in totality. This could lead to not only penalties but also other far-reaching consequences, as UAE authorities may have to convey the licensee's UAE substance test failure to tax authorities overseas. The exchange of information with tax authorities abroad opens up a Pandora's Box of issues around incorrect positions in tax filings in country by country reporting (CbCR), transfer pricing and tax treaty benefits whereby the UAE has been or could be seen to have been, used only as a place to transfer profits without adequate substance or actual presence.   The UAE authorities have reached out to licensees through email and social media platforms on the need to comply with the ESR and where applicable, to submit correct ESR notifications and reports on or before the deadline. The MoF has also held seminars to provide guidance and clarity on related issues. It is imperative that entities assess their ESR applicability accurately and ensure full and correct disclosure with 'substance' rather than 'form' in mind. Non-compliance will lead to penalties.

For questions or clarifications, contact MBG Corporate Services on

Sakina Dickenwala, 

Director - legal services, 

MBG Corporate Services

Manoj Pandey,

Partner - direct taxation 

MBG Corporate Services.

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