Economic Substance Regulations (ESR) for a Headquarters Business in UAE
Cabinet Resolution (No 31) of 2019 on Economic Substance Regulations (ESR), introduced on the 30th of April 2019, applies to corporate entities in the UAE which derive income from “relevant activities” in the financial years starting from the 1st of January 2019.
The legislation was specifically designed to provide reputation protection of jurisdictions in UAE and entities that are operating from them by making sure all income streams from the relevant activities mentioned in the Cabinet Resolution are on actual local activities and substantiate the utilization of the country’s low tax jurisdictions.
ESR for a Headquarters Business in UAE
The Economic Substance Regulations do not apply to all corporate entities in the UAE – rather, ESR applies to specific relevant entities that are carrying out relevant activities as per the Cabinet Resolution. Affected businesses are required to have a sufficient number of employees, physical presence, expenditure, and performance of core income-generating activities within the UAE.
The importance of full compliance with the newly introduced substance regulations can’t be understated with the potential liability to acquire extensive penalties. Our experts will be able to help your business navigate the new legislation and its complexities so you can meet the requirements of authorities.
A headquarters business is among those that are affected by the regulations. A licensee is considered a headquarters business in UAE if the licensee offers services to an international group of companies with the provision of the following:
- The licensee is responsible for the important aspects that have an impact on the performance of the overall group; and
- The licensee has taken responsibility for the group’s overall success
- Providing wrong information
- Failure to submit ESR notification and ESR Reports
- Non-compliance with the Economic Substance Test
- Providing wrong information
- Failure to submit ESR notification and ESR Reports
- Non-compliance with the Economic Substance Test
In order for headquarters businesses to be seen as “taking responsibility for the group’s overall success and the important aspects that have a significant impact on the foreign group’s performance,” services that are provided by the businesses must involve:
- Control or assumption of material risk on activities that are carried out by the foreign group of companies;
- Substantive advice that is related to control or assumption of such risks;
- Senior management
The position of a licensee in the corporate structure of a group isn’t relevant in determining whether or not it’s engaged in “Headquarters Business” as per the resolution. A licensee also doesn’t have to be the parent company for it to be considered a Headquarters Business. It will entirely depend on the nature of services which a business provides to a foreign group of companies.
For lease finance, service centre, shipping, distribution, investment fund management, banking, and insurance businesses, it can be a part of their business activities to offer headquarters services. In order to avoid duplicate reporting, a licensee won’t be considered as engaged in headquarters business and won’t have to demonstrate economic substance separately with respect to such activities.
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ESR Related Requirements for Headquarters Businesses
The Ministry of Finance provided a non-exhaustive list containing matters licensees are to consider prior to the end of any financial period:
- Hold board meetings (a quorum has to be reached for directors that are physically present in UAE)
- Make sure minutes of the board meeting are duly signed and kept on record in UAE
- Assess all relevant activities the entity has performed during a financial period with the approach of substance over form
- Assess type and amount of income earned from relevant activities during a financial period
- Identify the type and amount of expenditure and assets based in UAE including premises with respect to relevant activities
- Make sure access to assets incl. premises of the business can be demonstrated may it be through financial records and/or agreements
- Ensure supervision and control over outsourcing arrangements of the entity can be demonstrated through contractual agreements
- Determine the number of full time employees and other personnel that are based in UAE and responsible for carrying out relevant activities of the licensee
Economic Substance Regulations Specialists in UAE
Are you concerned whether your business has compliance obligations related to Economic Substance Regulations? If so, our team of experts based in the UAE can help. With over three decades of experience, Economic Substance Regulations provides a broad range of services which can most definitely help in meeting your legal requirements.
Performed by experienced professionals in the industry, the firm will help you achieve compliance related to ESR by providing guidance in the submission of the following:
- ESR Notification filing to relevant licensing authorities
- Annual reporting including assessment of the entity meeting the ESR test, gross income that is generated by the business from any relevant activity, etc.
- Help avoid penalties for failure to comply (AED 10,000 – 50,000 administrative penalty for the first year of non-compliance)
- Reviewing of existing agreements and practices that are followed by the company under corporate governance
Call us today or send us a message to have your questions and concerns addressed by our team!
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