Economic Substance Regulations in UAE require all the free zone, onshore and some other businesses to perform their services actively and validate their economic presence in the country. The ESR regulations are only applicable to businesses that execute certain ‘Relevant Activities’ as per the Cabinet of Ministers Resolution no. 57 of 2020. Businesses that perform those specific relevant activities only need to comply with the Economic Substance Regulations. Article no. 3 of Resolution no. 57 clearly defines the following relevant activities which make businesses fall under the scope of ESR;
- IP or Intellectual Property Business
- Shipping Business
- Headquarters Business
- Investment Fund Management Business
- Banking Business
- Service Centre Business
- Holding Company Business
- Lease/Finance Business
- Insurance Business
All of these businesses need to make sure that all the requirements of ESR are fulfilled. These businesses will be required for ESR filing and reporting on an annual basis.
CIGAs or Core Income Generating Activities
Article no. 3 of Resolution no. 57 also explains the Core Income Generating Activities of these businesses that execute the relevant activities as given by the Economic Substance Regulations in UAE. CIGAs are termed activities that are primarily carried out by the licensee for the purpose of generating enough income from the relevant activities being executed in the company or organization. The following can possibly be the CIGAs of each relevant activity;
IP or Intellectual Property Business
(i) Research and development should be the Core Income Generating Activity of an Intellectual Property Business that is patent or any other of a similar category.
(ii) Marketing, branding, and distribution shall be the core income-generating activity of an intellectual property business that is marketing intangible or any other of a similar category.
(iii) Income-generating activity for any exceptional cases shall be strategic decision-making, management of the business, management, and endurance of development-related risks, and management of risks related to exploitation of generated income of an intellectual property business. These activities also include decision-making and management about the third-party acquisition risks and related exploitations and overall safeguarding of the intellectual property business. The rest of the activities can include ancillary trading which is a way of generating third-party income.
The Core Income Generating Activity of a Shipping Business shall be crew management (such as governing, paying, and hiring the crew members), maintenance and overhaul of ships, tracking and overseeing the shipping process, overseeing and organizing voyages, and management of goods that need to be ordered or delivered.
The Core Income Generating Activity of a Headquarters Business shall be relevant decision-making about management, the incursion of expenditures of group operations, and coordination of activities that are executed in groups.
Investment Fund Management Business
The Core Income Generating Activity of an Investment Fund Management Business shall be decision making about the sale and hold of investments, calculations of reserves and risks, decision making upon hedging positions, interest fluctuations and currency, and reporting to investors or any other authority that regulates or supervises such business.
The Core Income Generating Activity of a Banking Business shall be fundraising, risk management related to interests, currency, and credit, working on hedging positions, providing customers with financial help such as credits or loans, management of the capital, and reporting to investors or any other authority that regulates or supervises such business.
Distribution & Service Centre Business
The Core Income Generating Activity of a Distribution and Service Center Business shall be storing and transporting goods, materials, and component parts that are ready for sale, inventory management, taking orders, and executing consultation and administration services.
Holding Company Business
The Core Income Generating Activity for Holding Business includes almost all the activities that are a part of this business and are related to the holding company business.
The Core Income Generating Activity for Lease/Finance Business shall be agreement on funding terms, acquisition, and identification of assets that are to be leased, deciding the durations and terms for any leasing or financing, revising and governing the agreements, and risk management.
The Core Income Generating Activity for Insurance Business shall be the calculation and prediction of risks, and execution of services of the insurance business to the customers including insuring and re-insuring, signing the insurance and reinsurance.
You should know : New Economic Substance Regulations for UAE Companies
Who Does Not Need Economic Substance Reporting UAE?
Any company that falls under the category of the exempted licensee or any company that falls under the Economic Substance Regulations in UAE but has not earned a penny throughout the year from its activities does not need ESR filing and reporting at the end of the year.
Choose the Best Service
If you want to start your new business and learn more about the relevant activities that your business will have to perform in order to comply with ESR in UAE, choose Economic Substance Regulations. Our talented and experienced service providers will guide you completely on how to file, report and perform the ESR test. The experts are always ready to give you the best.
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).