ESR Standards in Dubai: Consequences of Non-Compliance

Economic Substance Regulations (ESR) Standards in Dubai refer to the set of rules and guidelines established by the government to ensure that companies operating within the jurisdiction demonstrate genuine economic activities that align with their business operations. Under the ESR Standards in Dubai, these companies are required to demonstrate substantial economic presence in the UAE, indicating that they are conducting real business activities rather than being used solely for tax avoidance purposes.

Companies subject to the ESR Standards in Dubai are required to:

• Notify the regulatory authorities about their relevant activities and provide initial information.
• Prepare and submit an annual economic substance report detailing their activities, financial performance, and number of employees.
• Satisfy the "economic substance test" which involves meeting specific criteria related to the level of business activities conducted within the UAE.

Cabinet Resolution No. 57 of 2020 introduced a system of administrative penalties aimed at addressing various violations of the Economic Substance Regulations (ESR). This has led to an increase in the number of fines imposed on both Licensees and Exempted Licensees. The primary violations encompass actions such as providing inaccurate information, neglecting to submit ESR reports and notifications, and falling short of the UAE’s economic substance test. Businesses should be aware of the following ESR Penalties in Dubai:

Penalties & Legal Consequences of Failing to Notify

In accordance with Article 13 of Cabinet Resolution No. 57 of 2020 concerning economic substance obligations, any Licensee or Exempted Licensee neglecting to furnish a notification regarding economic substance regulations within the UAE will be liable to an administrative fine amounting to AED 20,000. The National Assessing Authority will notify the concerned entity of the penalty after establishing the commission of the infringement.

Penalty for Failing to File an ESR Report

Those entities that fail to submit the Economic Substance Regulations Report, along with any essential supporting details or documentation required by Cabinet Resolution No., will be subject to an administrative penalty of AED 50,000 as defined in Article 14 of Resolution No. 57 of 2020 pertaining to Economic Substance Requirements.

As per Article 14 of Cabinet Resolution No. 57 of 2020, if the company violates the aforementioned regulation within the fiscal year directly following the fiscal year in which the initial breach occurred, an administrative fine of AED 400,000 will be imposed.

Failure to Pass the Economic Substance Test

Businesses conducting activities within the UAE are required to successfully meet the Economic Substance Test for their involvement in a Relevant Activity. Nonetheless, as outlined in Article 14 of Cabinet Resolution No. 57 of 2020, during the initial year, a failure to clear the Economic Substance Test for each fiscal year will lead to a penalty of AED 50,000. Furthermore, according to Article 14 of the same resolution, a recurrence of the identical violation in the subsequent Financial Year will incur an administrative fine of AED 400,000. 

Penalty for Submitting False Information

Both Licensees and Exempted Licensees must exercise diligence in providing the Regulatory Authority with precise data and relevant paperwork. In line with Article 15 of Cabinet Resolution No. 57 of 2020, enterprises that submit incorrect information and neglect to rectify the error despite being aware of it will face a penalty of AED 50,000. The National Assessing Authority will communicate the imposition of the fine once the violation comes to light.

Penalty Notification’s Content

Licensees and Exempted Licensees who break ESR rules will be notified by the National Assessing Authority. The authority will provide violators with the following information:

• In the applicable financial year, either the Licensee or the Exempted Licensee violated the law.
• The purpose of the administrative penalty imposed by the ESR
• The organization was fined an administrative fine
• Administrative fines levied against an organization
• Upon issuance of the notice, the administrative penalty will commence 30 business days later.
• An administrative penalty can be contested
• The National Assessing Authority may impose an administrative penalty on Licensees or Exempted Licensees in accordance with Article 17 of Cabinet Resolution 57 of 2020.

If you wish to appeal, you may use the following grounds:

• Absence of any violation by the organization.
• Disproportionate nature of the imposed fine in relation to the offence.
• Imposition of a penalty exceeding the maximum limit specified in the Resolution.

The procedure for initiating an appeal against penalties related to Economic Substance Regulations within the UAE will be outlined in guidance issued by the National Assessing Authority.

Need Help?

The consequences of ESR non-compliance in Dubai are severe. To avoid legal penalties and hefty fines, it is wise to seek guidance from the top ESR experts in Dubai, like Reyson Badger. We take pride in providing comprehensive ESR notification and filing solutions. Our proficient team will manage all necessary documentation on your behalf, allowing you to dedicate your efforts to the core operations of your business. In a nutshell, ESR penalties in Dubai can be avoided by seeking assistance from Reyson Badger. For more information, please get in touch with Reyson Badger.