ESR Compliance for Banking Businesses in the UAE

On 30 April 2019, the United Arab Emirates issued Economic Substance Regulations to ensure their dedication as a member of the Organization for Economic Co-operation and Development (OECD) Inclusive Framework, additionally in response to the European Union Code of Conduct Group (EU COCG) on Business Taxation. As specified in Cabinet of Ministers Resolution No. 57 of 2020, the objective of the resolution is to determine that a Licensee or Exempted Licensee carrying out a Relevant activity has an adequate economic presence in the UAE by confirming the requirements and the criteria of the Economic Substance Regulations are met.

Banking business under ESR

According to Ministerial Decision No. 100 for the Year 2020, the Banking Business is a relevant activity that accepts cash deposits, which can be withdrawn and repaid on demand or according to the financial agreement. Additionally, the banking business utilizes such deposits for providing loans, advances, overdrafts, guarantees, or for making investments. 

However, licensees that are not involved directly in managing deposits and loans are not considered as conducting a Banking Business such as dealing advisory, arranging and other services of the clients. Additionally, carrying out banking services that deal with currency exchange and money transfers, as well as the sale and purchase of domestic and international stocks and bonds, currencies and assets, and dealing with money market transactions, are not considered banking businesses.

Read more: UAE ESR for Banking Business

In order to ensure compliance with the Economic Substance Regulations, the Licensee carrying out the Banking Business is required to meet the Economic Substance Test by fulfilling the following requirements:

  • conducting the relevant Core Income-Generating Activity
  • directing and managing Banking Business within the UAE
  • hiring an adequate number of qualified full-time employees in the UAE
  • having adequate expenses incurred by the Licensee for banking operations
  • having adequate physical assets in the UAE

Core Income Generating Activities (CIGAs) of Banking business

The provisions of Article 3 of the Cabinet of Ministers Resolution No. 57 of 2020 set down the Core Income Generating Activities that are associated with the banking business and include the following:

  1. Raising Funds and Managing Risks: Banking Business is related to activities such as raising funds, issuing financial contracts, and using advanced risk management strategies. The banking activities occur within the UAE which aims to protect the licensee’s base level of funding and control the cost of funds that are borrowed from Federal Reserve banks. 
  2. Taking Hedging Positions: Licensee that takes a hedging position which involves buying or selling an investment to mitigate the risks of potential losses. 
  3. Providing Loans, Credit, or Other Financial Services: The banking business is related to lending or investing customer’s deposits to generate the company’s core income. 
  4. Managing Capital and Preparing Reports: The licensees are required to manage capital and prepare reports that are to be submitted to the investors and Regulatory Authorities such as the Central Bank and Financial Free Zone Authority if the business is carried out in a Financial Free Zone.

Read more: Offenses and Penalties for Failure to Meet the Economic Substance Test

Directing and managing banking business within the UAE

According to the Economic Substance Regulations, to determine whether the banking business is directed and managed in the UAE, the Licensee is required to satisfy the following conditions:

  1. Arrange board meetings within the UAE. Moreover, the frequency of occurrence of these meetings depends on the quantity and complexity of the decision-making.
  2. Some board directors may also participate in the board meetings remotely through video conferencing or teleconferencing. This allows for efficient decision-making even if not all directors are physically present at the same location in the UAE. 
  3. The minutes of the board meetings must be recorded and must be signed by all the board of directors present at the location. 
  4. The minutes of the board meetings serve as an official record of the discussions, and decisions and maintain transparency and compliance with the Economic Substance Regulations.  
  5. The board of directors must have the necessary knowledge and should have necessary skills to successfully manage similar organizations in the past. 
  6. The minutes of all board meetings and the records of the Licensee must be kept in the UAE.

Hiring an adequate number of qualified full-time employees in the UAE

The banking business should have adequate full-time employees who should be qualified enough to carry out the CIGAs and should be physically present in the UAE.

Having adequate expenses incurred by the licensee for Banking operations

Banking businesses in the UAE must demonstrate that they are incurring expenses related to the CIGAs which include calculation of the wages and salaries of employees, technology costs, infrastructure costs, and other expenses for banking operations.

Having adequate physical assets in the UAE

The presence of physical assets in the UAE confirms the presence of economic activity and ensures that the bank activities are not inactive. This requirement is essential for the banking business to maintain a good reputation and transparency in the UAE financial sector.

Seek the expert services of trusted ESR Consultants in UAE

To effectively ensure compliance with the Economic Substance Regulations, licensees are advised to seek the expert services of trusted ESR Consultants in UAE. Thus, contact us today and we shall be glad to assist you.