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How Banking Businesses Should Meet UAE ESR Test?

After filing the UAE ESR notification to the respective regulatory authorities the companies in the UAE are now required to meet the Economic Substance Regulation (ESR) Test. The regulatory authority will consider the information filed in the ESR notification to determine whether the entities meet the conditions detailed in the ESR regulations. The regulatory authority determines whether the company is having adequate economic presence in the UAE in relation to the relevant activities it carries out in the UAE. In this backdrop let’s analyze how banking businesses can meet the UAE Economic Substance Test by demonstrating adequate economic substance in the Core Income Generating Activities (CIGAs).

How to Define Banking Business as per the Economic Substance Regulations?

The UAE ESR Law defines banking activity as businesses that deal with money deposits that can be withdrawn or that are repayable on demand or after a fixed period, or after notice, by means of cheque or other ways. And such deposits should be used for providing loans, advances, overdrafts, guarantees, or similar facilities or in investments. However, the financial intermediaries and the businesses engaged in foreign money exchange and remittals are not considered as banking businesses as per the UAE ESR.

Also read: How will Businesses be tested for ‘Adequate’ Economic Substance in the UAE?

How to Determine if your Banking Business is Conducting Core Income Generating Activities?

Example 1

PVC Bank is a UK bank whose branches in the UAE is providing financial services like current accounts, savings accounts, loans, credit cards, and other products and services to individual and corporate customers. In this case, the PVC Bank is conducting a banking business in the UAE as per the UAE ESR.

Example 2

ABC is a UAE branch of the Investment Banking division of the STV Banking Group. The activities of ABC include underwriting new debt and equity securities, facilitating and advising buyers and sellers on mergers and acquisitions, and marketing financial products. However, ABC’s funding is limited to borrowings from its head office and from other banks. In this case, ABC doesn’t come under the scope of ESR in UAE.

Example 3

GCA is the UAE branch of the JKL Banking Group that provides retail and corporate banking services globally. The activities of GCA are limited to providing UAE and regional clients with assistance and advice regarding the JKL Banking Group’s products and services, including assistance in the process of opening accounts with JKL Banking Group entities that are based outside of the UAE. GCA LLC is not considered to undertake a Banking Business. GCA, however, will be considered as undertaking Distribution and Service Centre Business as per the ESR in UAE.

How a Banking Business Meet the UAE Economic Substance Test?

The companies that carry out the relevant activities should meet the UAE Economic Substance Test as per the regulations. The regulatory authority gauges that the company is having an adequate economic presence in the UAE

1. Conduct Core Income Generating Activities in the UAE

To pass the UAE Economic Substance Test, the banking businesses should ensure that they are conducting the Core Income Generating Activities (CIGAs) in the UAE. The CIGAs of banking business as per the UAE ESR are listed below.

(a) Raising Funds & Managing Risk

(b) Taking hedging positions

(c) Providing loans, credit to Customers

(d) Managing capital and preparing reports to investors

2. Banking Business should be Directed and Managed in the UAE

In this test, the regulatory authority would assess if the banking business has conducted and attended an adequate number of board meetings in the UAE. The businesses should also ensure that

(a) Meetings are recorded in written minutes

(b) Quorum of the meeting is met and attendees are physically present in the UAE

(c) Directors have adequate knowledge and expertise to discharge their duties

3. Have Adequate Full-Time Employees, Assets, Expenditure

The banking business should have adequate full-time employees in relation to CIGAs. The employees should be qualified enough to carry out the CIGAs and should be physically present in the UAE. The banking businesses should also have adequate operating expenditure and physical assets in the UAE to pass the Economic Substance Test.

Why Choose Jitendra Chartered Accountants?

The companies in the UAE that carry out the relevant activities are now facing the requirement of meeting the Economic Substance Test. To prove adequate economic presence in the UAE, the companies need to hold board meetings with the quorum of directors in the UAE apart from ensuring they have an adequate number of full-time employee’s presence in the UAE. The compliance with the UAE Economic Substance Test is a task that demands professional assistance of a reputed ESR consultant like Jitendra Chartered Accountants (JCA). JCA has highly qualified chartered accountants and business setup consultants who ensure that the companies meet the Economic Substance Test in UAE. JCA assists the companies by,

  1. Assessing whether the company is under the scope of ESR in the UAE
  2. Check whether the company can meet the UAE Economic Substance Test
  3. Provide suggestions to pass the Economic Substance Test
  4. File annual UAE ESR Return

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