What is adequate or appropriate economic substance in the UAE?

Adequate or appropriate Economic Substance in UAE means that the organizations in the UAE are directed and managed, have adequate employees, possess physical assets, and incur adequate and appropriate expenditures. The organization has adequate or appropriate Economic Substance when the Regulatory Authority assesses that it carries out the respective relevant activities in the UAE and produces gross income from that activity under Economic Substance Test.

According to Economic Substance Regulations, adequate or appropriate Economic Substance for a Licensee or Exempted Licensee depends on the nature as well as the level of Relevant Activity that is carried out by it in UAE. In order to show that the Licensee and Exempted Licensee have adequate or appropriate resources, utilized assets and expenditure incurred it will have to assure that it maintains adequate records and supporting documents. The records and the supporting documents maintained will be assessed by the National Assessing Authority.

Under Economic Substance Regulations, what is adequate or appropriate Economic Substance in UAE for a Licensee or Exempted Licensee is that:

The licensee or exempted licensee should carry out core income generating activities in UAE

The most important requirement to show adequate or appropriate Economic Substance in UAE is that the Licensee and Exempted Licensee must carry out Core Income Generating Activities in UAE. In order to show that the Licensee or Exempted Licensee carries out the adequate or appropriate Economic Substance it should file an Economic Substance Return respective to the financial period in which it earned the revenue from a particular Relevant Activity. The Core Income Generating Activities are those activities through which a Licensee or Exempted Licensee generates its gross income from the Relevant Activity. Moreover, if there is any decision that is to be taken during the Core Income Generating Activities then it is required that a Licensee or Exempted Licensee is physically present in the UAE.

It is not necessary for a Licensee or Exempted Licensee to perform all Core Income Generating Activities listed in the Economic Substance Regulations for the respective Relevant Activity.

The licensee or exempted licensee should carry out the directed and managed test in the UAE

A Licensee or Exempted Licensee  carries out adequate or appropriate Economic Substance  that is assessed by directed and managed test to assure that it has held an adequate number of board meetings that is determined on the basis of the level of relevant activity in the UAE.  The Regulatory Authority in Economic Substance Regulations makes it mandatory that the Licensee or Exempted Licensee must hold at least one board meeting in the relevant financial year. The directed and managed test requires that;

  • A Licensee or Exempted Licensee should maintain a written minute of the meetings in the UAE and the attendees of board meetings should sign on it.
  • A Licensee or Exempted Licensee should meet the quorum of the board meetings and the physical Presence of the attendees should be ensured in the UAE.
  • Adequate knowledge and expertise are necessary for the board directors to deliver their duties

For the purpose of  Economic Substance Regulations, it must be considered that the ‘directed and managed’ requirements do not make it mandatory that the attendants must be UAE residents rather they mandate their physical presence.

Read Also : Exempted Licensees under ESR in the UAE

The licensee or exempted licensee should assure an adequate number of employees

Under Economic Substance Regulations, Economic Substance is adequate or appropriate when the Licensee or Exempted Licensee has an adequate number of employees who undergo relevant Core Income Generating Activities respective to the Relevant Activities. Moreover, the physical presence of the employees who are in charge of the Core Income Generating Activities should be ensured in the UAE and they should have the qualification to carry out the Relevant Activities. The employees can be either hired temporarily or on a long-term basis by the Licensee or any other organization related to the Relevant Activity.

The licensee or exempted licensee should incur adequate expenditure

Economic Substance is adequate or appropriate when the Licensee or Exempted Licensee incurs adequate expenditure by it or by outsourcing to those who provide third-party service in the UAE. But for outsourcing the activities carried out by the third party, staff and the expenditure should be within the premises of UAE and should be adequate in order to carry out the respective Relevant Activity.

You should know : ESR Notifications Post Submission Problems & Solutions 

The Licensee or Exempted Licensee should possess Adequate Physical Assets

The Regulatory Authority in  Economic Substance Regulations undergoes testing in order to evaluate that the Licensee or Exempted Licensee possesses adequate physical assets for carrying out the respective Relevant Activity thus, showing that it has adequate or appropriate Economic Substance in the UAE. Physical assets under Economic Substance Regulations include the business premises within which the respective Relevant Activity is carried on and that premises depends on the nature of the respective Relevant Activity. The Licensee or Exempted Licensee is required to provide evidence that either it owns that business premises or it are on lease and that the purpose of the premises is to carry out the respective Relevant Activity.

For more tailored advice regarding ESR, call us here in Economic Substance Regulations!