UAE ESR: Core Income Group Activities (CIGA) for Lease-Finance Business
The companies in the UAE should meet the economic substance test and file an economic substance return with respect to the financial periods in which they earned income from a Relevant Activity. The companies that carry out the Lease-Finance Businesses should meet the economic substance test by demonstrating that it is
- Carrying out Core Income Generating Activities in the UAE
- Being directed and managed in the UAE
- Have an adequate number of full-time employees in the UAE
- Incur adequate expenditure in the UAE
- Holding adequate physical assets in the UAE
Lease-Finance Business as per Economic Substance Regulations
An entity is considered as conducting Lease-Finance Business if it provides credit or financing for any kind of consideration including intra-group financing. The credit or financing may include loans to related or unrelated parties, entering into finance leases in relation to assets other than land, and providing credit in the form of hire purchase agreements, long term credit plans, and other types of financing arrangements.
Apart from interest, the definition of Lease-Finance Business covers other aspects such as origination and processing fees, gains upon conversion of a loan into the share capital of the debtor, and late payment penalties.
An entity won’t be considered as conducting Lease-Finance Business if it provides security in favour of the lender or when there is no expectation of consideration from the credit at the time it is granted. Also, investments in bonds or other debt instruments traded on an exchange won’t come under the definition of Lease-Finance Business.
Core Income-Generating Activities of a Lease-Finance Business
The ESR rules mention the following CIGAs for a Lease-Finance Business:
1. Agreeing on Funding terms
The Agreeing Funding Terms CIGA is about the funding of the Licensee, which includes the ‘agreeing type of funding’, quantum of funding, currency, rate of interest payable, and the security given. The type of funding in this CIGA can be any equity, preference shares, etc.
2. Identifying and Acquiring Assets to be Leased
This CIGA is about the leasing activity and it relates to identifying and verifying appropriate assets to purchase and then rent them to a lessee for an agreed period. This includes negotiating the acquisition and the terms of the supply of the assets to be leased or hired.
3. Setting the Terms and Duration of any Financing or Leasing
The Licensee should have authority over and also undertake the negotiation of the amount of financing or leasing to be provided, the financial and other terms and conditions, and the relevant legal agreements to be entered into.
4. Monitoring and Revising any Agreements
The companies that undertake the activity of lease-finance business conduct the CIGA of
(a) obtaining data about a borrower or lessee (or the group to which they belong)
(b) testing compliance against agreements
(c) extending the time-frame or the amending other terms of the financing, and
(d) ensuring all relevant information is given for decision-making and amended financing terms if any
5. Managing Risks
This CIGA of ‘Managing Risks’ involves activities associated with debt collection, monitoring and maintaining the conditions of the underlying leased assets, entering into swap and hedging arrangements, and developing and implementing strategies to reduce or spread risks.
Examples to Determine If a Licensee is Carrying out Core Income Generating Activities
Example 1
A UAE company named ABC LLC lends 1,000,000 to its subsidiary PQR LLC at 10% interest per annum. In this case, ABC is required to meet the ESR test with respect to the Lease-Finance Activity considering the interest-bearing shareholder loan granted to the subsidiary.
Example 2
ABC LLC subsequently assigns the AED 1,000,000 loan to AD LLC (UAE), another group company. After the transaction, AD LLC will have to meet the ESR test as it is carrying out the Lease-Finance Business.
Example 3
A UAE company named TCR LLC is part of the JCR group and acts as the group’s central treasury centre. TCR has borrowing arrangements with external financiers and lends the borrowed funds to group companies at the same interest rates charged by the external funders. Since TCR is offering finance to the group companies it has to meet the ESR test in relation to the Leas-Financing activity.
Why Choose Jitendra Chartered Accountants?
The companies that conduct the Lease-Finance business in the UAE have to meet the ESR test if it is carrying out the CIGAs in relation to the relevant activity. Meeting the ESR test is mandatory as the companies may incur hefty fines for failing the test. The Licensees in such a situation need to assess whether they can meet the ESR test and professional assistance of reputed ESR service providers will save them for fines and other consequences. Jitendra Chartered Accountants (JCA) is a professional ESR service provider in Dubai, UAE that assists the companies in complying with the ESR law. JCA has highly qualified business setup consultants and Chartered Accountants to assist the companies with
- Assessing whether the Licensee can meet the ESR test
- Develop an action plan if the Licensee fails to meet the test
- File and submit the annual ESR return to the Regulatory Authority