How UAE Businesses That Outsourced Relevant Activities Will Be Tested Under ESR?
Meeting the Economic Substance test in the UAE has become an absolute necessity for the companies to demonstrate that they are not committing any harmful tax practices. The companies will be tested on the basis of whether they are carrying out CIGAs in the UAE, are being directed and managed in the UAE, and have adequate employees and physical assets in the UAE. By meeting these key requirements, the companies can demonstrate to the relevant Regulatory Authority that they are maintaining an adequate economic presence in the UAE.
A company that comes within the scope of the ESR can outsource one or all CIGAs provided the activities are carried out in the UAE. This means that the company can use UAE-based employees, physical assets (including premises) of third parties, or related entities to satisfy the Economic Substance Test. The company can outsource the CIGAs to third parties but should retain the power to monitor and control the outsourced activities.
The companies that outsource the key activities need to face additional requirements to meet the Economic Substance Test. They need to demonstrate that they can supervise the outsourced activities of third-party service providers in the UAE and the outsourced company must have at all times in the UAE, individually and in the aggregate in relation to the CIGA being undertaken, an adequate level of the activities, employees, expenditure and premises.
Key Requirements for Outsourcing the Relevant Activities to Meet Economic Substance Test
A Licensee should:
- Have adequate supervision of the outsourced activity; and
- Ensure the outsourced activity is conducted in the UAE; and
- Ensure the third-party service provider has adequate economic substance in the UAE (an adequate level of the activities, employees, expenditure and premises )
- Ensure there is no double-counting of the resources of the third-party service providers
- If a part of the CIGA is outsourced, the Licensee should ensure that it is reporting accurate information to the Regulatory Authority, including details of the level of resources employed by the third-party service providers. The Licensee should give importance to third party service provider agreements entered into for the purposes of outsourcing.
Key Requirements for Outsourced Companies for the Economic Substance Test
An outsourced company must have at all times in the UAE, individually and in the aggregate in relation to the CIGA being undertaken, an adequate level of the followings:
- Activities, Employees, Expenditure and Premises
- The licensee must demonstrate its ability at all times to supervise the carrying out of the CIGA
- All parts of the CIGAs that are outsourced must be undertaken in the UAE
- If part of the CIGA is outsourced, timesheet with precise details of the level of the resources employed by an outsourced company
- Agreement with the outsourced company should meet the requirements of the ESR and allow disclosure to a regulatory authority
- Finally, the outsourcing must not be done with the objective to dodge compliance with the ESR test
Why Choose Jitendra Chartered Accountants?
The companies in the UAE that come within the scope of the Economic Substance Regulations are required to meet the economic substance test. The mainland, free zone, and offshore companies must demonstrate adequate economic substance in the UAE by undertaking Core Income Generating Activities (CIGAs), be directed and managed in the UAE, and also having adequate employees, expenditure, and physical assets in the UAE.
However, a major question in relation to the ESR was how a company can meet the test if it is outsourcing CIGAs and other requirements including the employees to third-party service providers. The companies, in this situation, need the professional assistance of a reputed ESR service provider in Dubai, like the Jitendra Chartered Accountants (JCA). JCA assist the companies by
- Assessing how the companies can meet the Economic Substance Test
- Devise strategies and suggest remedial measures if the companies fail to meet Economic Substance Test
- Help file and submit annual ESR returns