On 10th August 2020, the UAE Cabinet of Ministers issued amendments to Resolution-31, also known as the Economic Substance Regulation, and introduced Resolution No. 57. According to Resolution No. 57, which encompasses and compels any establishment that conducts business in the UAE to meet the Economic Substance purview. For this purpose, established businesses ought to pass the Economic Substance Test that corroborates the licensees ‘returns, corresponding to their business activity. The Economic Substance Test has to be met with all entities that fall under the cognizance of the ESR regulation.
What are the key requirements for Economic Substance Test?
According to the Economic Substance Regulation, as conferred within the Ministerial Decision no. 100, a Licensee must satisfy the following requirements in order to show that it has sufficient substance in the UAE within a certain fiscal year;
Core Income-Generating Activities
Essentially, a Core Income-Generating Activity has to be established to meet the Economic Substance Test. An organization does not need or is not compelled to undertake all the relevant activities mentioned in the Article, but it is required for it to carry out at least one. CIGAs can also be carried out by outsourcing third-party service providers which are also considered by the ESR regulations. Section 4.3.2 of Ministerial Decision no. 100 also lists all the activities that are not included in CIGAs but can be outsourced including payroll services, IT, and legal services, to mention a few.
Direction and Management in UAE
A sufficient number of business conferences ought to be organized within the UAE, the number of conferences is determined by the activities being carried out by the establishment. The following factors have to be considered;
- All the meetings of the Relevant Activity must be recorded in terms of hours and minutes and these records must be retained in the UAE.
- Physical presence in UAE is required during a meeting.
- The record of the meetings must possess all the decisions taken in a meeting.
The “directed and managed” criterion does not specify that board members (or an equivalent) must reside in the UAE for the purposes of the ESR Regulations and clarification. Instead, when making strategic decisions, the board members (or an equivalent) must be physically present in the UAE.
Regard to the income earned
The following conditions must be met;
- Ample workers (whether full-time or part-time, temporary or permanent) are physically present in UAE.
- The undertaking of adequate expenditures in UAE.
- Possess adequate assets in UAE.
Each Licensee’s degree and kind of Relevant Activity will determine what is sufficient or appropriate for that Licensee. A Licensee must make sure that he keeps sufficient documents to prove that the resources and assets used and the expenditure incurred was enough and acceptable. It is not the primary intent of the ESR Regulation to impose requirements on businesses with regard to the number of employees employed, expenses incurred, or physical assets utilized, nevertheless if the Licensee is engaged in a genuine business activity, executes CIGAs in the UAE with the employees, expenses, and has possesses ion of physical assets, and if it complies with the applicable laws governing a Relevant Activity.
Why adequacy (employees and assets) is required to meet the ESR test?
As different businesses vary in scale, their adequacy of employees differs. The number of employees considered adequate for a small-scale business might not be enough for a larger organization. It makes sure that there is a sufficient number of workers carrying out the concerned tasks. The need for sufficient physical assets is to guarantee that a Licensee has acquired sufficient physical resources to conduct a Relevant Activity in the UAE. Depending on the nature of the relevant activity, physical assets may comprise offices or other types of company premises (such as warehouses or facilities from where the relevant activity is being done). Such premises may be owned or leased by the Licensee, so long as the Licensee can demonstrate that it has the legal authority to use them for performing the Relevant Activity (e.g. lease agreement).
Seek Expert ESR Consultation in the UAE Today!
Entities or licensees are highly recommended to seek expert ESR consultation to avail of a full ESR guide and to stay compliant with the Regulatory Authorities’ regulations and standards. Thus, 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.