UAE ESR: What are the Core Income Group Activities (CIGA) for Headquarter Businesses
One of the key requirements for a Licensee to meet the Economic Substance Test in the UAE is to carry out Core income Generating Activities (CIGAs) in relation to the relevant activities in the UAE. That is, a Licensee needs to demonstrate economic substance and file an annual economic substance return in respect of those financial years in which any gross income was earned from a Relevant Activity. The Licensees that conduct the Headquarter Business must carry out CIGAs such as ‘Taking relevant management decision, ‘Incurring operating expenditures on behalf of group entities, and Coordinating group activities’ to meet the UAE Economic Substance Test.
What is the Headquarters Business as per Economic Substance Regulations?
As per the UAE Economic Substance Regulations (ESR), a Licensee is considered as carrying out a headquarters business if it provides services to foreign group companies and through the provision of such services,
- The licensee must shoulder responsibility for the overall success of the group, or
- The licensee must be responsible for a significant aspect of the overall group’s performance
However, the ESR guidelines have specified certain pre-defined conditions for a business entity to be considered as taking over the responsibility for the overall group’s success or an important aspect of the group’s performance. The services provided by the entity must involve,
- Provision of senior management
- The assumption or control of material risk for activities carried out by foreign group companies; or
- Substantive advice in relation to the assumption or control of such risks
Core Income Generative Activities of Headquarters Business
1. ‘Taking relevant management decisions’
This CIGA for the headquarters business involves the decision-making on significant functions and risks for the group companies like the decisions on material acquisitions and purchases, sales and marketing strategy of the Group Company, product development, and business standardization. To meet the economic substance test, all the individuals involved in the decision-making process must be physically present in the UAE.
2. ‘Incurring operating expenditures on behalf of group entities’
This CIGA involves the expenditure incurred by the entity by delivering significant services for or on behalf of the group companies such as engaging specialist advice, procuring technology on behalf of the group as a whole, or buying substantial assets or specific services.
3. Coordinating Group Activities
An entity is considered as carrying out this CIGA if it arranges the coordination of significant activities such as marketing, HR, IT, finance, tax, etc. in such a way as to yield the best results for the entire group company as opposed to individual group companies.
Examples to Determine If a Licensee is Carrying Out Core Income Generating Activities
ABC LLC is a UAE company which is part of MNC that has numerous subsidiaries around the world. The individuals in the senior management of ABC are in charge of respective subsidiaries in different regions. The senior management team of ABC assists the local management team of its subsidiaries around the world providing strategic direction and helping manage material risks. In addition, ABC LLC supports the group in managing risk through the procurement of external advice centrally, and the associated costs are shared amongst the group. ABC LLC is required to meet the economic substance test in the UAE as its activities are within the scope of Headquarters Business.
A company named PQR LLC (UAE) is part of a UK headquartered group and has subsidiaries in the Kingdom of Saudi Arabia (KSA). PQR LLC has the power to influence the management and operations of the subsidiaries in the KSA. PQR LLC’s senior management also communicates with the local management at the KSA subsidiary regarding the latter’s performance and also shares valuable insights from the group with the subsidiary. In this case, however, PQR LLC is not required to demonstrate adequate economic presence in the UAE because the KSA subsidiary is following the strategies set by the group company headquartered in the UK.
Why Choose Jitendra Chartered Accountants?
The companies that conduct and generate a gross income from the relevant activity of the headquarters business are required to demonstrate economic substance and file economic substance return in the UAE. Carrying out the CIGAs is one of the vital requirements for the Licensee to meet the economic substance test. The licensees in this situation require the assistance of professional ESR service firms like Jitendra Chartered Accountants (JCA) in determining the CIGAs they carry out in the UAE and the gross income generated from such activities. JCA has highly qualified business setup consultants and Chartered Accountants who guide the companies in
- Assessing whether the Licensee can pass the ESR test
- Suggest remedial measures if the Licensee fails to meet the test
- File and submit annual ESR Returns to the Regulatory Authority