Background about ESR
Under the OECD (Organization for Economic Co-operation and Development), all the participating countries, including the UAE, have to follow the guidelines for companies filing their tax returns. Contrary to a decade ago, UAE is no longer a tax haven for businesses. With VAT being introduced, UAE follows a strict standard for its Tax framework. The UAE ESR for introduced to comply with the standards of Base Erosion and Profit Shifting (BEPS). ESR or Economic Substance Regulations in accordance with BEPS provides a platform for international tax bodies to regulate businesses across countries. Due to disproportionality between the tax laws, it costs governments billions of dollars in revenue.
Therefore, companies with relevant activities under the ESR UAE Law are bound to submit ESR notification, run economic substance activity, and file an ESR return. A headquarter business activity is a relevant activity under the ESR law of UAE.
What is a headquarter Business?
A business license in the UAE is considered a headquarter business when it provides services to foreign companies or groups of companies. The licensee takes the overall responsibility for the group’s success, and the licensee is a key decision-maker and responsible for significant aspects of the group’s overall performance.
How to Identify a company as a headquarter?
To identify a company as a headquarter business’s under the ESR law, it must demonstrate:
- Provision of senior management in the UAE
- The assumption and control of material risks for foreign group activities/ companies
- Substantive evidence to the relevant activity and risk control measures for the same.
Also Read ESR for Lease-Finance Business in UAE
Understanding Substance over form in the UAE
While understanding the ESR law for headquarter business in the UAE, it is essential to grasp the concept of the accounting principle of Substance over Form. It was designed in such way that when an auditor examining the company’s financials gets the accurate picture of the companies relevant activities through its events and transactions. Since the headquarter business involves the company trancing across brooks countries, the Substance over Form accounting ensures that financials can accurately measure and report the financial, legal, and economic impact of a particular transaction compared to its legal form. It will ensure that it doesn’t mislead people and the true intent of the transaction remains undisclosed.
When companies try to build artificial business transactions to shield their true intent in order to avoid paying taxes, the Substance over form allows the Tax authorities to measure the relevant activities of the company against its legal form. Therefore, no tax benefit is allowed to companies who have businesses activities that are not exercised within the form.
Substance requirements are as below:
- The company should be managed and directed in the UAE for its activity or a specific activity.
- The company’s CIGA must be audited in the UAE.
- The company should have allocated an adequate level of annual operating funds in addition to the number of employees and premises.
What are the core income-generating activities for a headquarter?
As mentioned above, conducting the CIGA is one of the important scopes of identifying a business activity in the UAE. The company must audit its financials for the financial period under which they generated gross income from the relevant activity. Headquarter activity has to take the CIGA audit after undertaking the economic substance test for eligibility. The CIGA confirms the company generates income from the appropriate activities and is classified as a headquarters.
- Taking relevant management decisions
The company in the UAE has senior management that takes core decisions that directly affect the company’s performance. The decisions include purchasers, companies strategies for sales and marketing, and research and development, but are not limited.
- The company incurred operating expenditures on behalf of the group entities.
The company provides important decisions of capital expenditure and operating expenditures.
- Coordinating Group Activities
The decisions and execution regarding the procurement for the group may involve departments like HR, Finance, Marketing etc. It relies on an expert auditor to identify and apply the CIGA scope to the activities. Find the best accounting services in Dubai with Farahat and Co. today. Click here.
Some companies can identify their activities under the ESR law as a headquarter business; however, it has some exemptions. To avoid duplicate reporting, companies that undertake banking, insurance, investment funds, lease finance companies and shipping and distribution companies are not considered as headquarters. The accounting revolving around the Headquarters reporting can get complex at times. We provide expert accounting services that can help you identify the relevant activities and comply with the accounting standards. Click here to contact Economic Substance Regulations today!!Our chartered accounts are experienced and provide their expert consultation to companies in the UAE and especially for UAE free zones.
Bola Olaoye is a Legal Senior Associate and holds an LLB from Adekunle Ajasin University as well as a Bar Certificate from the Council of Legal Education. With experience spanning 14 years, she knows the ins and outs of UAE’s laws and practices and has helped provide clear and concise guidance to clients on the appropriate law-abiding measures to be taken concerning Economic Substance Regulations (ESR).