ESR Penalty in the UAE
Have you received the Penalty Email from Federal Tax Authority for non-compliance with Economic Substance Regulation in the UAE? Well in this article we will discuss the reasons penalties are levied and possible steps to resolve them.
Before we discuss the reasons why you might have received the penalty, we would bring to your notice the important due date in the ESR. Delay in submission is one of major non-compliance.
ESR Notification: to be filed (by licensee & exempted licensee conducting relevant activity) within 6 months from the end of Financial Year.
ESR Report: to be filed (by licensee earning income from relevant activity) within 12 months from the end of the Financial Year.
Reasons / Causes of non-compliance and receipt of penalty:
- ESR Submissions (Notification &/or Report) for FY 2019 were submitted in Dec’2020. Many entities have followed the same pattern and assumed Dec as the deadline for ESR submission. Therefore, going with that assumption, entities have ended up submitting their notification in Dec’21 instead of Jun’21 for FY 2020. This has resulted in a delay in the submission of the Notification and has attracted penalties of AED 20,000. Submission of FY 2019 in Dec’2020 was due to a change in the Regulation and hence Dec’20 was the extended deadline for FY 2019 submission. However, from FY 2020 onwards the due date was as defined in the regulation which is mentioned above (in italic).
- Entities have submitted the notification well within the due date, however, did not submit the ESR report on time. This will attract a penalty of AED 50,000.
- Entities had incorrectly assessed the ESR applicability in FY 2019 and the same interpretation had been followed in FY 2020. Adding to it there was a delay in submission which causes a penalty from FTA.
- FTA has requested additional information, but the entity failed to respond back within the due date.
- The entity had submitted a Notification with “No” relevant activity. However, later it was identified that the entity conducts relevant activity and requested amendment for the same. However, the amendment request was not approved within the reporting due date and therefore there is a delay in the submission of the Report. Unless relevant activity & relevant income is notified in the notification, ESR report tab will not be activated on the dashboard. Therefore, an amendment request is mandatory.
The important point to be noted:
It is very important to assess the activities undertaken by your business during the reporting period. The applicability of ESR will solely depend on the activities undertaken by your business. Incorrect assessment may lead to monetary & non-monetary penal consequences.
If you are penalized what should be the next course of action. Licensees are given the option to appeal against the penalty and provide clarity to the authority.
Steps to Appeal:
- Carry out a detailed assessment on the activities undertaken by your business whether it falls within the definition of relevant activity defined under Economic Substance Regulation (Assess the actual activities carried during the reporting period and not only ones mentioned in your trade license)
- Identify the ESR submission done by you on the MoF portal
- In case you come across the below outcomes then you may appeal against the penalty:
- The entity is not conducting Relevant Activity, but have still submitted delayed notification: -
For e.g., Notification was due in Jun’21. However, since for FY 2019 the submission was done in Dec’2020 (which was extended due date), you followed the same FY 2020 (which means you filed notification in Dec’21). This can be appealed since the entity is not conducting Relevant activity as per ESR and it is not required to file the notification.
- The notification was submitted within the due date however ESR report was not submitted: - In such scenarios, firstly assess the activities, whether the activity is qualifying as a relevant activity, as per ESR. If not qualifying as any relevant activity, then you may proceed with an appeal by providing satisfactory supporting evidence.
- If relevant activity is conducted, then to identify whether the delay in submission was due to any technical error on the portal which resulted in delay. The support for such cases can be presented before authority, during the submission of the appeal. If the delay was due to negligence, then it is a sure cause of a mistake.
Let us know in case there are any other instances where the entity is penalized, and you are citing our support on conducting ESR applicability assessment on your business activities or looking for support on submission of the appeal to FTA. You may get in touch with our subject expert:
For ESR Penalty Related Queries
CA Dhara Yagnik