For ESR purposes, Licensees involved in Relevant Activities and generating Relevant Income in a given Financial Year must establish economic substance within the UAE that aligns with the nature and scale of their activities and income. Whereas, Licensees are not obliged to meet the Economic Substance Test, including submitting an Economic Substance Report if they do not generate any Relevant Income during a Financial Year. However, they are still required to fulfill the Notification obligation as outlined in Article 8 of the ESR Regulations. Thus, Licensees are advised to seek the expert services of trusted ESR Consultants in UAE to effectively ensure compliance with ESR regulations.
How to Meet the Economic Substance Test?
To meet the Economic Substance Test, Licensees are required to carry out Core Income-Generating Activities (“CIGA”) within the UAE. CIGAs are central activities that contribute to generating gross income from the Relevant Activity. These activities include and are not limited to Banking Business, Insurance Business, Investment Fund Management Business, Shipping Business, Lease-Finance Business, Intellectual Property Business and Holding Company Business. Essentially, Licensees are not mandated to perform all listed Core Income-Generating Activities, but they must engage in those activities that result in Relevant Income being generated within the UAE.
Additionally, the Relevant Activity must be overseen and managed in the UAE. The directed and managed assessment entails holding an appropriate number of board meetings in the UAE and ensuring their physical presence during these meetings. The number of meetings should align with the level of Relevant Activity, taking into account the requirements specified by relevant laws or the Licensee’s constitutional documents.
The directed and managed requirement also stipulates that meeting minutes must be maintained within the UAE, with all attendees physically present. Directors should possess the necessary knowledge and expertise to fulfil their roles, not simply execute decisions made outside the UAE. Meeting minutes should document all strategic decisions related to Relevant Activities and be signed by directors who are physically present in the UAE. Quorum requirements should adhere to applicable laws or the Licensee’s constitutional documents.
It is imperative to note that, the directed and managed criterion does not necessitate that board members be UAE residents; they must be physically present in the UAE when making strategic decisions. If the Licensee is overseen by shareholders, owners, partners, or an individual manager, the same requirements apply to them.
Depending on the level of Relevant Income, the Licensee should maintain an adequate number of qualified full-time (or equivalent) employees who are physically present in the UAE. These employees may be either directly employed by the Licensee or by another entity under temporary or long-term contracts. Additionally, the Licensee should incur appropriate operating expenses in the UAE and possess sufficient physical assets, including premises.
Still more, the determination of what is considered “adequate” or “appropriate” varies based on the nature and scale of the Relevant Activity. The Licensee must maintain records that demonstrate the adequacy of their resources, assets, and expenditures. These records, along with supporting documentation, will be reviewed by the National Assessing Authority to assess compliance.
ESR Requirements as per the Business Size
It is acknowledged that businesses vary in size, and the requirements for employees, expenditures, and physical assets that are deemed “adequate” or “appropriate” for a large or medium-sized business may differ for a small business. The ESR Regulations aim to avoid imposing undue burden on businesses as long as they engage in genuine business activities, perform CIGAs in the UAE using their available resources, and comply with existing legislation governing Relevant Activities. The employee requirement ensures an appropriate number of qualified employees, while the physical asset requirement ensures the availability of suitable assets for conducting the Relevant Activity in the UAE. These assets may include owned or leased offices, warehouses, or facilities, provided that the Licensee can demonstrate the right to use them for the Relevant Activity.
Choose Top ESR Consultants in UAE
Noncompliance with the Economic Substance Regulations accrues fines and penalties upon Licensees. Thus, to effectively ensure compliance, Licensees are advised to seek the expert services of trusted ESR Consultants in UAE. Therefore, contact us today and we shall be glad to assist you.
Syed Hassan Ali carries with him an experience of 13 years in providing legal guidance and consultancy. He is a holder of two degrees, one in Business Management and the other in Economics for Engineers and Scientists. He carries an in-depth knowledge of the UAE market and continues to be an asset to businesses, providing clarity regarding applicability of the ESR regulations as well as guide them in making informed decisions.