With the issuance of the Cabinet Resolution No. 57 of 2020 regarding Economic Substance regulations (ESR) on 10 August 2020, the Federal Tax Authority (FTA) was selected as the National Evaluating Authority. It is the initiative taken by the government of UAE in line with its global commitment to worldwide trade regulatory bodies such as the Organization for Economic Co-operation and Development (OECD). ESR enforces an obligation for UAE entities together with offshore companies as well as branches of local and foreign companies that carry out certain activities, to keep satisfactory economic substance in UAE.
How to Prepare for an ESR Audit?
Economic Substance Regulation audit preparation in the UAE necessitates an upbeat approach. Here is the step-by-step process for preparation of the ESR Audit;
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Check Eligibility
The primary step to prepare for an ESR Audit is classifying the eligibility of whether your business falls under the scope of ESR or not. ESR applies to companies involved in relevant activities such as;
- Insurance
- Investment fund management
- Banking
- Lease-finance
- Shipping
- Holding companies
- Headquarters businesses
- Intellectual property
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Keep Correct Financial Statements
The next step is to ensure your business has correct and comprehensive financial statements. The records must clearly show how income is produced in the UAE through core income-generating activities (CIGA). It is important to keep proper documentation to validate substance.
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Verify Economic Substance
It is fundamental to meet economic substance obligations for businesses engaged in relevant activities. This comprises having adequate;
- Physical presence
- Employees
- Expenditure
Make sure to review regularly your business operations to guarantee compliance.
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Gather Documents
The next compulsory step is to gather all essential documents for the ESR audit in the UAE. Businesses have to keep clear records of business’s economic activities, such as contracts, invoices, employee records, and board meeting minutes led in the UAE.
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Submission
The final step is to submit your ESR notifications and reports timely. It is important to note that notifications are compulsory even if a business isn’t involved in relevant activities. Make sure to submit on time because failing to submit or inaccurate reports may lead businesses to suffer financial penalties.
What is the Compliance Checklist for UAE Businesses?
A comprehensive compliance checklist is important to ensure that businesses in the UAE avoid penalties. Here is the compliance checklist that businesses have to meet legal, financial, and operational standards set by the government;
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Economic Substance Regulations (ESR)
If a business falls under the ESR scope, make sure that the business has to obey by filing ESR notifications and reports yearly. It is important to keep records of core income-generating activities (CIGA), employee information, and financial activities to fulfill ESR obligations.
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Registration and Licensing
Every business has to hold a legal trade license. It must be issued by the Department of Economic Development (DED) or the relevant free zone authority. It is important to ensure the opportune renewal of the business license. It helps to avoid penalties and possible suspension of operations.
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VAT Registration and Filing
If the company’s taxable turnover surpasses AED 375,000, it must be registered for VAT. It is suggested to ensure timely submission of VAT returns and payment to the Federal Tax Authority (FTA).
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Ultimate Beneficial Ownership (UBO)
UAE businesses have to submit UBO information to the authorities this detail must present the individuals who hold noteworthy ownership in the company. This confirms transparency and compliance with anti-money laundering obligations.
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Anti-Money Laundering (AML) Compliance
Explicit businesses in high-risk sectors have to fulfill the obligations of AML protocols. This comprises;
- Implementing internal controls
- Customer due diligence procedures
- Regular reporting to the authorities
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Labor Laws and Employment
The last but not the least compliance Checklist for UAE Businesses is to ensure compliance with UAE labor laws. It includes accurate employment contracts, opportune salary payments, and upholding health insurance for employees.
Conclusion
Obeying the compliance Checklist and the steps for preparing the ESR Audit process are mandatory for businesses working in the UAE. By following the steps and the compliance checklist, companies can ensure they fulfill legal standards. Regular evaluations and professional guidance from top consultants such as Farahat & Co. will help businesses stay on top of developing regulations. Their team ensures sustained success in the UAE’s modest business environment.
