The Economic Substance Regulations were introduced by the government of the United Arab Emirates in response to the membership of the Organization for Economic Co-operation and Development (OECD) Inclusive Framework. The ESR Regulations were implemented on onshore and free zone companies and other small and medium enterprises on 30 April 2019 to demonstrate their adequate economic presence within the UAE about the Relevant Activities they undertake. Thus, businesses should seek the services of trusted ESR Consultants in the UAE to ensure compliance with the Economic Substance Regulations.
Meaning of Adequate Economic Presence as per Economic Substance Regulations
In accordance with the Economic Substance Regulations, businesses are required to meet the Economic Substance Test to ensure that they are carrying out substantial or adequate economic activities in the UAE. Therefore, all the businesses carrying out Core Income-Generating Activities, irrespective of their size, are required to have an adequate number of qualified full-time employees, operating expenditures and physical assets depending on the scale and nature of the Relevant Activity carried out by them in the UAE. This means that the business should have enough resources and facilities to conduct its business activities effectively and contribute to the growth of the national economy of the UAE.
Small and Medium Enterprises (SMEs) and ESR
It is acknowledged that businesses vary in size and, therefore, to meet the requirements of adequate economic presence within the UAE under the Economic Substance Regulations, SMEs should take into account the following points:
- Resource Optimization: The requirement of adequate full-time employees, operating expenditure and physical assets under the ESR does not necessarily mean that the SMEs are required to employ an excessive number of employees or incur big budget expenses to meet the Economic Substance Test. Instead, they are required to optimize their resources and facilities in such a way that enables them to carry out their necessary Core Income Generating Activities efficiently.
- Tailored Approach: SMEs are required to compare their budget with the resources and physical assets that are essential for their business.
- Documentation and Record-Keeping: The Economic Substance Regulations require the Regulatory Authorities to maintain thorough records of their Relevant Activities carried out in the UAE. Therefore, SMEs are required to keep essential records to keep transparency in their operations and to ensure compliance with the Economic Substance Regulations.
- Outsourcing Considerations: To enhance their business reputation and to ensure compliance with the Economic Substance Regulations SMEs can outsource certain Core Income-Generating Activities to an Outsourcing Provide. However, the Licensee is required to ensure that the conditions are met as specified under Clause (2) of Article 6 of Cabinet of Ministers Resolution No. 57 of 2020.
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Key Requirements of the Economic Substance Test
To ensure compliance with ESR, the Small and Medium Enterprises (SMEs) are required to satisfy the following criteria to meet the Economic Substance Test:
- Core Income Generating Activities (CIGAs): The SMEs must conduct CIGAs that are of central importance to the Licensee for the generation of the gross income related to their Relevant activities within the UAE.
- Directed and Managed in the UAE: SMEs are required to ensure that they hold and attend an adequate number of board meetings depending on the level of relevant activity they are carrying out within the UAE. Moreover, they are required to record written minutes, meet the quorum requirements, and have the expertise to discharge their duties.
- Adequate Number of Employees: SMEs are required to hire a sufficient number of qualified full-time employees to carry out CIGAs related to the relevant activity carried out by them within the UAE.
- Adequate Operating Expenditure: SMEs are required to ensure that they have sufficient records to demonstrate the adequacy of operating expenditure incurred by them with respect to the nature and scale of the relevant activity carried out by them within the UAE.
- Adequate Physical Assets: The requirement for adequate physical assets is intended to ensure that SMEs have sufficient physical assets to carry out a Relevant Activity in the UAE. These physical assets may be owned or leased and include offices or other forms of business premises concerning the nature and scale of the relevant activity carried out by them. However, the SMEs should provide the evidence for the right to use the premises for the purposes of carrying out the Relevant Activity and to ensure compliance with Economic Substance Regulations.
Seek the expert services of ESR Consultants in the UAE
Compliance with Economic Substance Regulations is a vital aspect of conducting business in the UAE. Therefore, it is advisable for SMEs to avail the services of expert ESR Consultants to understand the compliance with Economic Substance Regulations relative to the size and nature of their business. 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.