ESR Test Compliance

Entities in the UAE generating income from any Relevant Activity outlined in the Economic Substance Regulations (ESR) must meet the Economic Substance Test. Companies must meet the Economic Substance Test to demonstrate they have adequate substance in the UAE relating to the Relevant Activities provided under the ESR.

UAE companies need to conduct an assessment to determine the gaps in their existing substance and the substance required to meet the Economic Substance Test. Jitendra Chartered Accountants (JCA) has a team of ESR consultants who can help UAE companies meet the Economic Substance Test.

Key Principles of Economic Substance Test

We can provide you with a robust ESR strategy to meet the Economic Substance Test and demonstrate adequate substance in the UAE. The following are the key principles:

Core Income Generating Activity (CIGA) Test

Carry out core activities in the UAE.
Outsourcing of CIGA is permitted under certain conditions.

Directed and Managed Test

Businesses need to be directed and managed in the UAE by

Conducting board meetings in the UAE with the minutes
Having a UAE-based manager and/or directors etc.

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Adequacy Test

Businesses in the UAE need to have:

Adequate number of qualified employees
Annual operating expenditures in the UAE

Consequences of Not Meeting the ESR Test

Failing to fulfil the Economic Substance Test may push the UAE businesses into dire consequences such as:

Penalties up to AED 400,000
Risk of trade license suspension/withdrawal or non-renewal
Authority will deem the company lacks substance, leading to adverse tax impact

Risk Mitigation Plan to Avoid ESR Test Failure

Our ESR consultants can work with companies in the UAE to develop a strategy to meet the Economic Substance Test. The below strategy can help you mitigate the risk of ESR Test failure in the UAE:

Ensure the core income-generating activities are conducted in the UAE
Carry out adequate board meetings in the UAE and document the minutes of the meeting (in writing)
Appoint directors have the necessary skills and expertise to make strategic decisions related to the Relevant Activity
Ensure the directors are physically present in the UAE
Ensure the company has an adequate number of qualified employees, premises, and operating expenditure in the UAE with respect to the Relevant Activity
Ensure the company has adequate “supervision and control” in case of outsourcing arrangements. (The outsourced CIGA must be conducted in the UAE)

JCA’s Role in Assistance for Economic Substance Test

We have highly experienced ESR advisers who can assist our UAE clients in meeting the Test. Our Economic Substance Test Services in the UAE include:

Performing a GAP analysis to identify the gaps between your company’s current substance and the required level of substance
Suggest remedial measures and actions to ensure you have fulfilled the Economic Substance Test and are complying with the ESR requirements
We can advise our clients on how to document the Relevant Activities that are being “directed and managed” from the UAE
Our ESR specialists can advise the UAE businesses on the appropriate level of adequacy that needs to be maintained in the form of management and in the form of operational activities