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UAE SMEs should establish strong legal framework

January 31st is the deadline to ensure businesses adhere to the ESR regulations

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UAE SMEs should establish strong legal framework

As of January 31st, the deadline to ensure businesses adhere to the ESR regulations approaches, Abdulla Alawadi & Associates, one of UAE’s oldest law firms, urges the SMEs in the country to establish a proper scalable legal framework within their organisations to ensure that such regulations can be followed seamlessly. Especially during the pandemic when the businesses are challenged, an established legal structure within the organisation will ease the pressure irrespective of whether the organisation is new or old.

“UAE is one of the fastest-growing economies in the world, and with that comes rapid changes in the systems, laws among several other changes to ensure that the nation achieves its economic goals. As part of the global compliance laws such as the ESR, regulations are one of the many that organisations will have to follow soon. 

Eventually, as the economy progresses, there are chances that we may see similar global legal requirements. Firms in the UAE should be swift when it comes to transition and adherence to such requirements. For that, a robust legal structure and framework are necessary whether one is a fairly large SME or an organisation with few members,” stated Adv. Abdulla Alawadi, Founder and Chairman of the law firm.

As part of the UAE’s commitment as a member of the Organisation for Economic Cooperation & Development (OECD) Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance.

“The regulations require UAE companies that carry out the below-listed activities to prove that they maintain the adequate economic substance in the country relative to the activities they undertake.  Banking, insurance, investment fund management business, lease finance, shipping, holding companies, intellectual property, distribution, and service centre businesses, among other similar businesses, have to adhere to the ESR laws. Organisations active in these sectors are considered ‘relevant entities’ and must comply with economic substance regulations,” added Advocate Abdulla.

Economic Substance Regulation applies to all onshore or free zone businesses, a multinational entity or sole proprietor within the identified relevant sectors.

“The purpose of the regulations is to ensure that UAE entities report actual profits that are commensurate with the economic activity undertaken within the UAE. Resolution 57 and Ministerial Decision 100 have been prepared in consultation with the OECD and the European Union (‘EU’). One of the objectives is to prevent non-domiciled owners or directors who register and operate companies in the UAE from tax evasion in their home countries,” stated Hesham El-Samra, Senior Associate – Litigation.

UAE entities falling under this bracket should immediately look at completing the formalities on ESR impact assessment, ESR implementation, ESR gap analysis, and ESR compliances. This will help the companies avoid significant fines ranging from AED 10,000 to over AED 300,000, among other serious consequences, in non-compliance with the ESR requirements.

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