The ESR has an objective to stop non-resided directors who have registered companies in the UAE from dodging to pay tax. It is a significant step by the UAE to ensure the country is not debarred as non-supportive by the EU. In turn, the UAE Government issued a series of Orders and Resolutions In 2019. It collectively states as the Economic Substance Regulations. it presents approaches to stop harmful tax practices in UAE, as per OECD international standards. Businesses in the UAE must stay modernized and comply with the Economic Substance Regulations.
What is Holding Company Business in the UAE under ESR?
According to the ESR, a Holding Company Business in the UAE is an explicit type of business activity with the following properties;
- The Holding Company Business retains and manages shares in subsidiary companies. This includes activities like engaging directors, approving funds, and supervising the direction of the subsidiaries.
- The holding company makes planned decisions for the whole group of subsidiaries. This strategic decision may include financing, funds, risk management, and a business plan.
- The Holding Company Business allocates resources professionally across its companies. It aids in modernizing processes and exploits the inclusive value of the business.
- The Holding Company Business should not be directly engaged in any viable activities except handling its shareholdings.
- The Holding Company Business generates income from its investments in other companies under ESR. This capital comes in the form of extras.
- The Holding Company Business may also earn investment gains from vending their equity interests in companies at a more sophisticated price than the original outlay.
How does a Holding company ensure compliance as per ESR in the UAE?
To ensure compliance for holding company business as per ESR in the UAE, here are the important steps to consider such as;
- File the ESR Notification
The primary step is to File the ESR Notification to the authorities. It must be done within 6 months of the end of your business financial year. This ESR notification will help to state your position as a Holding Company Business. It will also help to unveil any related activities you may start.
- File the Annual ESR Report
The next step after filing the ESR notification to the authorities is to prepare and file the annual ESR report. This filing must be done within 12 months (a Year) of your business financial year. This Annual ESR Report will deliver particulars on your activities during the year. It may include;
- The number of workers you have hired in ESR-linked activities
- The niche and value of your funds in subsidiary companies
- Any expenses acquired in the UAE associated with your holding activities
- Record Keeping
The next important step is to gather and maintain comprehensive records of your investment activities. These records may include;
- Minutes of Board meetings that file your managerial procedures about your subsidiaries.
- Investor plans or discussions that validate transparency in your communications with subsidiary ownership.
- Financial reports of your subsidiaries to recognize their operations and make well-versed investment decisions.
- Any agreements or contracts related to your subsidiaries, such as shareholder agreements or management service contracts. This demonstrates the legal framework for your relationships with the subsidiaries.
- Capable team
The most important factor for every business’s success is a capable team. Make sure that you have a capable team with the proficiency to handle your subsidiaries efficiently. The qualified team may include;
- Members of the Board with applicable industry understanding. They can deliver calculated pinpoints to your subsidiaries.
- Capable specialists also help to supervise the investment portfolio. They know financial markets and investment breakdowns.
- Substance Over Form
Last but not least step is to sidestep from the structures that seem purely intended to dodge ESR protocols. The ESR authorities always look for open business operations. You must present;
- A strong investment plan to outline your objectives
- A genuine economic purpose for your Holding Company
What are the Penalties for Non-Compliance of ESR in the UAE?
Non-compliance with ESR in the UAE can result in a series of penalties for Holding Companies. It depends on the nature of non-compliance such as;
- A penalty of AED 20,000 will be imposed if you do not submit the ESR notification or any compulsory information within time.
- If a Holding Company fails to conduct the Economic Substance Test in a particular financial year, a penalty of AED 50,000 will be imposed.
- A penalty of AED 400,000 will be imposed if a holding company fails to submit an ESR report within time.
Conclusion
It is important to ensure compliance with ESR for the holding company businesses in the dynamic corporate land of UAE. You can get guidance from Farahat & Co which is highly professional in the field of Economic Substance Regulations.
