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ESR Compliance: 5 Requirements for the UAE Economic Substance Test

The UAE has been implementing various regulations, including VAT, AML, to streamline the economy as per global standards and the latest in this series is the UAE Economic Substance Regulations (ESR). As per the ESR, the companies in the UAE are required to demonstrate the economic substance in the relevant activities they carry out within the UAE. The companies need to first notify the regulators whether they carry out the relevant activities as per the ESR or not and then follow it up with the requirements for the UAE economic substance test and file ESR report.

The businesses that are within the scope of the UAE ESR, must prepare themselves to implement strategies for the annual UAE ESR notification and reporting. They must also need to satisfy the requirements for the UAE Economic Substance Test for which professional guidance of reputed ESR services firms in Dubai, UAE can be availed. The companies are still in dark over the requirements for satisfying the Economic Substance Test and this article is a comprehensive guide on the ESR Test Requirements.

Below are the 5 requirements the companies need to have to undergo the UAE Economic Substance Test:

1. Conduct Core Income-Generating Activities Within the UAE

The UAE ESR guidelines have listed specific tasks associated with each relevant activity called the core income-generating activities (CIGA). For example, the CIGA of the companies carrying out the relevant activity of the banking business is

  1. Raising funds, managing risk including credit, currency and interest risk
  2. Taking hedging positions
  3. Providing loans, credit or other financial services
  4. Managing capital and preparing reports to investors or government authority

To demonstrate the UAE Economic Substance Test, the employees of the company need to conduct the CIGA. However, it is important to note that the CIGAs of the company should be performed by the employees who are UAE residents.

2. Direct and Manage Business From Within the UAE

The Economic Substance Test assesses whether the companies are directed and managed from within the UAE to ensure that they conduct an adequate number of board meetings in the UAE. For each board meeting held in the UAE:

  • a quorum of directors must be physically present in the UAE
  • meeting minutes must be maintained and signed in the UAE
  • directors attending the board meeting must have the necessary skills and expertise to discharge their fiduciary duties.

However, a Holding Company Business is not required to be directed and managed in the UAE, except where this is a requirement of the relevant licensing authority.

3. Employ Full-time Staff in the UAE

To demonstrate the Economic Substance Test in Dubai, the companies need to employ an adequate number of qualified full-time staff who need to be physically present in the UAE and must be performing the CIGA. The ESR has the option to count the directors as employees for the purpose of the Economic Substance Test if they carry out the CIGAs in addition to their fiduciary duties. However, the regulations mandate that the directors need to be physically present in the UAE and must attend the relevant board meetings of the company.

4. Incur Operating Expenditure in the UAE

To satisfy the UAE Economic Substance Test, the companies are required to ensure that adequate operating expenditure is incurred within the UAE on the Relevant Activity. However, the Ministry of Finance has clarified that the ESR doesn’t intend to force the companies to incur expenses beyond their needs provided they carry out genuine business activity and carry out CIGA in the UAE.

5. Retain Adequate Physical Assets in the UAE

According to the ESR guidelines, the companies should either have adequate levels of physical assets in the UAE used for conducting the CIGA, or it needs to have an adequate level of expenditure on outsourcing for the Relevant Activity. The Ministry of Finance clarifies that the definition of “adequate” is depends upon the nature and level of the Relevant Activity being undertaken.

List of Relevant Activities for the UAE Economic Substance Test

The ensure ESR compliance, the companies operating in the UAE are required to demonstrate economic substance in the Relevant Activities they carry out in the UAE. The businesses need to look beyond the activities stated in the trade license and consider the actual activity they conduct in the UAE to determine the Relevant Activity. The following is a list of relevant activities for the onshore and free zone companies as per the UAE ESR Guidelines:

  1. Banking
  2. Insurance
  3. Investment fund management
  4. Leasing and finance
  5. Headquarter Business
  6. Shipping
  7. Intellectual property Business
  8. Holding company business
  9. Distribution and service centre

Why Choose Jitendra Chartered Accountants for ESR Compliance Services?

All the mainland, free zone, and offshore companies in the UAE should ensure they are compliant with the UAE Economic Substance Regulations, which is a mandatory requirement. The companies need to notify and file an annual ESR report in order to demonstrate they are having adequate economic substance in the Relevant Activities they carry out within the UAE. However, the companies are struggling with the process & requirement of the ESR notification including the assessment of the Relevant Activities. It is here that the companies require the professional assistance of an ESR service firm like Jitendra Chartered Accountants. JCA’s highly qualified Chartered Accountants can help the companies in:

  1. Assessing whether the companies are subject to the Economic Substance Regulations
  2. File the annual UAE Economic Substance Notification with the regulatory authorities
  3. Prepare and submit the UAE Economic Substance Report to the authority annually
  4. Suggest recommendations on the Economic Substance test if the company is not satisfying the same

The assistance of JCA is indispensable to the companies as the failure to comply with the regulations would attract heavy fines. Also, the companies need to prepare the ESR report meticulously as any insufficient or false information would also attract penalties. JCA can help the companies comply with the ESR requirements by offering economic substance advisory thereby building a better image before the authorities.

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