Implementation of ESR on Businesses that Conducting Lease-Finance Activities

The UAE companies are faced with a new regulatory compliance requirement called the Economic Substance Regulations (ESR) which mandates the companies to comply with ESR Notification filing, Economic Substance Test, and ESR Return filing. The enactment of the ESR is expected to bring more clarity to the tax practices followed by the companies in the UAE, thereby ending the country’s previous tag of being a tax haven. The companies now need to have economic substance in one or more relevant activities they carry out in the UAE. However, the companies in the mainland also the firms operating in the free zones are have been seeking more clarity on the relevant activities, especially the lease-finance business activity. This article attempts to remove the lid over the ESR applicability on the lease-finance business activity.

Also read: Economic Substance Regulations (ESR) in DIFC Free Zone

What are the Relevant Activities as per the UAE Economic Substance Regulations?

In the context of the UAE ESR law, the first and foremost thing a company needs to know is whether it is conducting the relevant activity or not. The mainland, free zone, and offshore entities need to conduct a self-assessment on the activities they conduct to determine if they come under the scope of the UAE ESR. The below is the list of the relevant activities as per the UAE ESR law

  1. Banking
  2. Insurance
  3. Investment and Fund Management Business
  4. Lease-Finance Business
  5. Headquarters Business
  6. Shipping
  7. Holding Company Business
  8. Intellectual Property Business
  9. Distribution and Service Centre Business

More details on relevant activities

What is a Lease Finance Business in the Context of Economic Substance Regulations (ESR)?

A company in Dubai or UAE is considered to be carrying out the Lease Finance Business if it provides credit or financing for consideration.  The credit or financing encompasses activities such as

  1. Giving loans to related or unrelated parties, entering into a finance
  2. Leases in relation to assets other than land, and
  3. Providing credit in the form of hire purchase agreements, long term credit plans, etc.

Core Income Generating Activities for Lease-Finance Business

While submitting the UAE ESR notification to the regulatory authorities the companies should specify whether they are generating income from the relevant activities or not. These are the Core Income Generating Activities (CIGA), which the companies need to identify. The following are the CIGAs for Lease-Finance Businesses:

(a) Agreeing on funding terms

(b) Identifying and acquiring assets to be leased (in the case of leasing)

(c) Setting the terms and duration of any financing or leasing

(d) Monitoring and revising any agreements

(e) Managing any risks

Related: ESR Compliance: 5 Requirements for the UAE Economic Substance Test

The Ministry of Finance states that the CIGAs mentioned in the UAE ESR guidance are not an exhaustive list in relation to the relevant activities. The companies in Dubai, UAE should also note that the entity need not conduct all the CIGAs stated in the UAE ESR guidelines. The companies that conduct the lease-finance activity should first consider the activities from which it earns an income and also make sure that such activities are being carried out within the UAE.

Also read: A Comprehensive guide on UAE ESR

Relevant Authority for Lease Finance Business

The companies that conduct the relevant activities in the UAE are required to submit the ESR notification to the regulatory authority mentioned in the Cabinet Decision No (58) of 2019 issued on 4 September 2019. The regulatory authority for the companies in the mainland is the Ministry of Economy meanwhile the regulatory authority for free zones is the respective free zone authority. This means for the companies licensed by the financial free zone DIFC and ADGM the authority is DIFC Authority and ADGM Authority respectively.

Why Choose ESR Services from Jitendra Chartered Accountants?

The mainland, free zone, and offshore companies in the UAE are required to comply with the ESR if they carry out the relevant activities in the UAE.  This requires the companies to self-assess whether they are conducting the relevant activity in the UAE and also need to notify the regulatory authority whether any income is generated from any of these activities. Before filing the notification the companies are recommended to seek the professional assistance of an ESR service like the Jitendra Chartered Accountants (JCA). JCA has a strong team of chartered accountants and business setup consultants with sound knowledge in every nuance of the UAE ESR law. JCA assists the companies in

  1. Filing and submitting the UAE ESR notification to the Regulatory Authority
  2. Drafting and submitting the UAE ESR Return to the Regulatory Authority
  3. Suggesting recommendations to the companies if they fail to meet UAE Economic Substance Test

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