How is ESR impacting Business Structure in UAE?
In countries across the globe, the Economic substance Regulations (ESR) have been implemented to obtain approval from major regulatory bodies. These regulations are directed at jurisdictions that give corporations minimum tax liabilities and require those organizations that carry out particular types of business operations to show that in that jurisdiction they have sufficient economic substance.
The UAE government adopted its economic laws on substances in April 2019. These new laws ensure that all onshore and free zone-based companies registered in the country that carry out related activities are properly involved in the country-and investing in it.
Furthermore, the regulations on non-resident directors using the UAE business environment solely for tax purposes were adopted for international scrutiny. However, not all firms are impacted by the laws-only those operating in banking, distribution, intellectual property, and transportation, as well as holding companies and the headquarters of companies.
Let's look at what the rules specify and how you and your organization could be affected.
- Structure of Management- When determining if improvements must be made, the manner in which a UAE company is operated and owned is important. Essentially, companies that fall under these rules need either a managing director or a member of the senior management team who is physically based in the UAE and running the company. In addition to daily board meetings in the UAE, this is explicitly outlined in the law itself, with written minutes taken as evidence and signed by all directors.
- Correct information of Income generation- Economic substance regulations make sure that the organizations have mentioned the exact income source. As it may affect their taxation as wrong income information can lead to paying a higher amount of tax to the government. Concerned companies need to make ensure that all of the earnings of the business are generated throughout the legal and right sources in UAE. This simply means that work carried out must be done by an organization that has a physical presence here, regardless of its customers.
- Office spaces and staffing- Companies operating in the business sectors need to show that they have a particular number of workers working in the UAE as part of the Economic Substance Laws. In addition, proof of a sufficient amount of office space is often needed to accommodate the employees. Another rule notes that companies in the UAE will need to have sufficient physical assets-implying that it could be dependent on the operation of the firm-and thus income. An office address is important when it comes to getting the right company set up. While many smaller companies that lie beyond the laws of the economic substance may simply rent a P.O. Box address to run a business in the UAE.
- Reporting Liabilities- In order to comply with these new regulations, the concerned companies must declare details of the related activities set out by the government of the UAE to the authority that granted their original commercial license. Failure to do so will result in a fine of up to AED 50,000 and repeat violations would encourage more serious financial penalties, leading to the suspension or revocation of the commercial license of non-compliant firms.
- Transparent information of Taxes- ESR would require companies to use legitimate and correct business practices for operating in the UAE. They should also provide the correct financial reports otherwise will have to pay extra taxes.
- Liquidation and deregistration of Businesses- If the company does not comply with the ESR, if it consistently fails to provide development details or to meet any of the conditions set out in the legislation, then the license of the organization will not be extended or, in certain situations, the entity will have to liquidate the company. It will have a major effect on the country's economy. This also helps in keeping the company's management on its toes so that no mistakes are made or errors are made, which will hamper the functioning of the company.
- Competitors for Company- The introduction of the ESR would eliminate businesses that commit malpractice and unethical business practices and thereby pave the way for businesses that are better and do work in the right manner, creating healthy competition between rivals.
Economic laws on substances are of great significance and will have an effect on UAE businesses. It can have a good effect on companies, but management must be extra vigilant to have the right and accurate details about the company. Since it is the first year of economic substance rules, so the degree to which any of these regulations will be enforced remains to be seen.
Ultimately, if you are eager to start a company - any kind of business here in the UAE, it is important to thoroughly understand the rules and regulations about the kind of business that you want to incorporate here. While there is a lot of advice out there, it is always worth talking to a professional about the responsibilities behind any opportunity you choose to explore.
Despite these recent regulatory changes if you plan to move or start a new company in the UAE, in one of the most desirable business and lifestyle destinations in the world, you will still be able to benefit from a tax-free corporate climate.