How to File ESR Assessment in UAE?: To determine if a business in the UAE satisfies the economic substance test, the National Assessing Authority conducts an ESR assessment as per the Cabinet Resolution No. 57 and Ministerial Decision No. 100 of 2020.
All companies in the UAE that fall under the Economic Substance Regulations’ definition of “relevant activities” are required to comply with this requirement. The distribution and service center industry, intellectual property enterprise, holding company business, shipping firm, headquarters business, lease/finance industry, investment fund management corporation, insurance business, and banking business are the basic elements of these relevant operations.
The Ministry has not entailed any CIGAs in the directives, but other core income-generating activities are carried out under all these pertinent activities.
Working Model of ESR Assessment
The process by which it is determined whether or not an entity or a business has passed the ESR test for a pertinent financial year is known as process substance regulations assessment. You must comprehend the following details regarding this evaluation;
- At the end of the financial year, the entire assessment is carried out by the National Assessing Authority which is FTA (Federal Tax Authority) in this case.
- After the ESR notification and ESR report have been submitted, the assessment process is carried out. The National Assessing Authority evaluates whether or not the business passes the economic substance regulations test using the information provided by the business in the notification and report.
- Under everyday circumstances, the assessing authority is bestowed six years to finish off the assessment following the conclusion of a single reportable year. No assessment will be made for that particular year after this point.
- The six-year time limit does not apply if certain factors, such as willful misconduct, deception, misinterpretation, etc., played a role in the process. If the process falls under certain circumstances, the authority may be given further time.
- Before deciding on the high-risk IP licensees, the regimes will have to assemble a lot of data. Failure to provide enough information may result in a failing grade on the evaluation.
- Following the verdict of the assessment procedure, the National Assessing Authority will determine whether or not to notify the licensee that he has passed the ESR test.
Criteria for Passing the ESR Assessment
The following conditions of the Assessing Authority have been established under economic substance regulations in the UAE and must be met to complete the assessment procedure and pass the ESR test;
- The licensee must carry out enough relevant business as well as generate its primary sources of revenue in the UAE.
- The licensee is accountable for guaranteeing that all of these operations are rectified and conducted within the United Arab Emirates.
- Every licensee engaging in a pertinent activity is required to hire a sufficient number of workers to manage the corporation. A sufficient number of workers means the employer can only hire as many employees that can easily work in the workplace. These workers may be on a contract or permanent, but they must ensure their physical presence in the United Arab Emirates.
- If a licensee has transferred any of the primary income-generating tasks to other parties, the licensee alone should have the needed control and oversight, not the outside party. These outsourced representatives must carry out CIGAs on behalf of the licensee in the UAE. In the event of outsourcing, it is also crucial to provide an appropriate supply of personnel and resources.
- It is essential for the licensee to actively carry out management tasks comprising holding sufficient board meetings of the firm to enrich the status of the enterprise. Along with each director being competent for their role, the board of directors must be present in person at all meetings. The meeting’s minutes must be documented, signed, and never permitted to leave the United Arab Emirates.
- If a licensee hasn’t rendered any relevant revenue in a relevant reportable period, the assessment process can still be carried out, but they don’t need to pass the ESR test.
Are Exempt Licensees required to file ESR Assessment?
The assessment procedure is not essential for licensees who are exempt from the relevant financial year to pass the ESR test. An exempted licensee is merely needed to submit a notification and provide documentation of its exemption. A licensee will be deemed to have failed the ESR test if an insufficient proof is not revealed to support their exemption.
What Happens If a Licensee Fails the UAE ESR Assessment?
According to Cabinet Resolution No. 57, a licensee who fails the ESR test and the assessment process would pay a fine of 50,000 AED. A license holder faces a fine of 400,000 AED if they fail an ESR test again after more than a year.
Can a Licensee File Against the Decision of Failing the ESR Test?
Yes, it is completely permissible for the licensees to file against the penalty email using the online Ministry portal if they think they should have passed the ESR assessment or the assessing authority might have made an error executing the evaluation.