What is the Economic Substance in Accounting?

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The Economic Substance Regulations (ESR) broadly apply to all United Arab Emirates (UAE) onshore and free zone legal entities that carry out one or more of the Relevant Activities (RA) referred to as “licensees”.

What are the relevant activities under ESR compliance? Banking, Insurance, Leasing & Finance, Intellectual property, Holding Company Business, Shipping Companies, and Distribution & Service Center Businesses.

What must be included in Economic Substance Regulation in UAE? The report should include:

  • Square footage area of the premises
  • Total income, net profit, and total tangible assets of the Licensee
  • Total income, total operating expenditure, and net profit from the RA
  • Core Income Generating Activities carried out in relation to RA
  • Number of full-time equivalent employee(s) engaged in the RA
  • Details of the outsourced service provider
  • The declaration that Licensee satisfies the Economic Substance Test
  • Copy of the standalone financial statements

What are the core requirements for Economic Substance in UAE? A Licensee must satisfy the following key criteria to meet the Economic Substance Test in relation to any Relevant Activity carried on by it:

  • Perform ‘Core Income Generating Activities’ (“CIGAs”) in the UAE.
  • Be ‘directed and managed’ in the UAE; and
  • With reference to the level of activities performed in the UAE – they must have an adequate number of qualified full-time employees in the UAE, incur an adequate amount of operating expenditure, and have sufficient physical assets/premises in the UAE.

To know more, reach out to the experts at PKF UAE – who will then understand the organization’s structure and nature of business activities undertaken in the UAE to evaluate the applicability of Economic Substance Regulations in UAE.

How can they then help you? They can help you in preparing and submitting the ESR report to the Ministry of Finance. They also review and submit appeals for a penalty since a delay/error in compliance can attract penalties up to AED 400,000. PKF UAE can also assist in reassessing the status of the business under the ESR framework and its activity.

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