Economic Substance Regulation

On April 30, 2019, the government of UAE issued ESR under the Ministers Resolution No. 31 of 2019. The UAE government then issued Ministerial Decision No. 215 of 2019, delivering guidance on applying the regulations on September 11, 2019. It provided data related to Regulatory Authorities responsible for administering Relevant Activities in Cabinet Resolution No. 58 of 2019,

issued on September 4, 2019.Organizations registered in the UAE and conducting activities regarding economic substance are under compliance. Further, license companies by the associated licensing authority will refer to as “Licensees” in the regulations to deliver any associated training within the UAE.

Evaluation of whether a company is conducting a Relevant Activity

The rules apply to registered businesses in the UAE, including the firms operating in Free Zone or Financial Free Zone. Therefore, we consider it if these firms conduct the below activities:

Banking businesses

This business means accepting or receiving a money deposit that can withdraw or be repayable on demand or after notice via cheque or other methods such as online transfer. We use these deposits either complete or in parts mentioned below:

  • Firstly, we are giving guarantees, loans, overdrafts, or relevant facilities.

Secondly the associated statute usually licenses Commercial Bank organizations with banking businesses in UAE.

In addition, UAE does not consider businesses under Banking Business if it has foreign exchange currency and remit money. Or companies that act as financial intermediaries in purchasing and selling stocks and bonds, commodities, currencies, coupled with money market transactions under Banking Business.

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Intellectual Property Businesses

If a business operates in the UAE and can hold, they consider driving or exploiting profit from intellectual property assets as conducting an intellectual property business.
The intellectual property of a business is an invisible asset. It is therefore copyright, patents, trademark, technical knowledge, and creative ideas.

UAE companies have the owner of their intellectual property. However, do not earn separately traceable gross profit from such assets. Concluding, UAE businesses with the right to these assets could not conduct an intellectual property business.

Suppose there is any sign that the company has manipulated its income to avoid showing economic substance regarding intellectual property business. In that case, the associated authority will take the required steps to assure that the entity follows the requirements of rules and regulations.

Shipping Businesses

If a business demands to include in the shipping business, it must process one or more ships at the international level to transport cargo, passengers, or both.

The ship, according to regulations, do not include the below ones:

  • Small vessels (tonnage not greater than 10 tons)
  • Fishing vessels (vessels for fishing)
  • Leisure vessels (cruise ships or private yachts)

If you are a business entity while driving international traffic with the below activities, they significantly consider you as a shipping business:

  • Sale of tickets
  • Rental charter of ships
  • Management of crew ships
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Insurance Businesses

Distribution and Service Centre Businesses:

They associated it with two different business activities under the Regulations’ Relevant Activity.

A licensee has a distribution business to purchase raw materials or finished products from a foreign business entity and allocates those purchased to companies outside the UAE.

Further, a Licensee has a service center business in the only case of delivering consultancy, administrative services, or other matching services to a foreign company. Therefore, the foreign company must use the provided services to assist its business operations outside the UAE.

According to regulations, Licensees do not have distribution businesses that only gain finished products from a third party or provide finished products. At the same, organizations also do not have the Service Center Business that delivers their services to the third party according to the ESR rule of UAE.

A company performing transactions that accomplish the criteria of consulting a “Distribution and Service Centre Business” activity is under ESR. Suppose it delivers proof that they did not do the transaction in the ordinary course time of the company procedures.

Holding Company Businesses

A company is a holding company in UAE only in case:

  • It gets fair interests in another organization, and
  • It is not involved in any other organization’s operation.

Similar interests include having shares and any other instrument that delivers the License holder with the leadership percentage in an organization.

A licensee who is only operating activities regarding a holding company business, as a result, would be subject to reduced requirements of Economic Substance according to compliances.

As long as a registered business gets output from holding assets other than equitable interest or performing commercial activities is not a holding company.

Investment Fund Management Businesses

Insurance Businesses:

Is your Licensee engaged in completing insurance contracts? In both life and non-life sectors? Along with captive insurance and reinsurance contracts? Yes, it is under an insurance business. An associated authority would regulate a company registered in the UAE undertaking insurance business operations. The law does not consider licensees that deliver captive insurance services conducting Distribution and Service Centre Business. It is because of prevention of duplication in reporting, Entities such as insurance agents, brokers, or other businesses of UAE that are providing insurance services? But is it not included in assumed insured challenges? You are not in the insurance business.

Headquarter Businesses:

They consider only a headquarter business in case it is delivering services to foreign companies and delivering:
  • Firstly, responsibility for the overall success of a group.
  • And accountable for the essential parameters behind a company’s overall performance and results.
Since you are a registered business in the UAE while holding the responsibility of the overall performance of a company, the services provided must include below:
  • Firstly, the top management provisions
  • Secondly, the control and hold of material risk for its activities on behalf of the group
  • Thirdly, we are delivering important advice regarding the control of risky materials.
Distribution and Service Centre Businesses

Investment Fund Management Businesses

The business delivers voluntary investment management services regarding foreign and local investment funding. Some of the discretionary investment management services are below:

  • Making finance
  • Disinvesting
  •  Deciding related to risks

They do not count organizations involved in delivering investment advisory and administration of funds in it. In case, they coupled it with other similar services of managing funds, it is also not under the set standard.

Furthermore, the investment fund is not Investment Fund Management Businesses until someone else manages it. That must be part of the same entity that holds the investment fund.

Lease-Finance Businesses

They counted a licensee to go with a lease finance business to provide credit and finance services to its clients. Providing finance and credit services therefore includes assigning loans, giving credit, and similar financing agreements to a foreign group entity. It will also fall under a lease finance business because of any accountability.

We will not declare the company under it when there is no plan to consider.

Moreover, investment in debt instruments, bonds, and other related securities that trade on a complied exchange, will not count as a lease financing business activity.

Furthermore, in evaluating performing an associated activity, businesses must use “Substance over form.” Therefore, must follow the regulations.

The above approach demands companies to consider the company operations mentioned on their registration certificate or commercial license. In addition, we also needed it to particularly examine the current activities during the financial year.

Economic Substance Criteria

When a business with UAE registration conducts an associated activity determines whether the company is a Licensee or fits with the ESR.

A licensee is subject to an Economic Substance Test and to mention below:

  • Firstly, the associated business operation which the Licensee is conducting is being directed and managed within the UAE.
  • Moreover, the Core Income-Generating Activities carried out within the boundaries of the UAE; and
  • Further, licensee has suitable premises, employees, and expenditure in the UAE.

Core Income-Generating Activities (CIGAs)

Notably, a licensee must conduct CIGAs regarding its chosen Relevant activity in the UAE. Core Income-Generating Activities are essential to the Licensee to establish gross income earned from its Relevant Activity.

The guidance clearly shows that all the CIGAs mentioned in the regulations for particular Relevant Activity do not show the comprehensive list of all CIGAs. A licensee must notably consider its activities to get gross profit and assure that all its CIGAs perform within the UAE boundaries.

They can do it according to each Relevant Activity.

While deciding, a Licensee must consider that people accountable on its behalf are present within the UAE.
Once we decide, as a result, they can conduct their business in the UAE.

Who is bound for regulations?

UAE registered companies that get a release from demonstrating economic substances are as below:

  • Importantly, it includes the companies owned directly or indirectly by a Dubai government or a government institute. The government ownership in businesses registered with UAE must be a minimum of 51% or more.
  • While the firms that conduct the associated activity? But don’t, establishing any profit from it during its financial period is not required to file an ESR. However, these companies still need to mention whether it conducts the Relevant Activity.
Economic Substance Criteria

How do we assist?

ESR is compulsory for all companies registered in the UAE. It is among the essential components of business regulations in the UAE. We significantly assist you in the below mentioned ways:

  • Firstly, file your ESR compliance for each year, with complete assurance of correct filings.
  • Moreover, perform assessments related to whether you are within the compliances.
  • Further, we uniquely assess whether you are in a condition to satisfy the Economic Substance Test.
  • Notification filing help
  • Finally, we assure your compliance with the ESR.

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