UAE ESR: CIGAs Performed in the UAE for Holding Company Business
The UAE Economic Substance Regulations require a licensee to meet the economic substance test in the UAE and file an economic substance return corresponding to the specific financial periods in which the entity generated any gross income from the relevant activity. The Licensees that undertake the Holding Company Business Activity in the UAE need to meet the Economic Substance Test in the UAE by conducting the Core Income Generating Activities (CIGAs) in the UAE, employing adequate qualified full-time employees in the UAE, incur adequate expenditure and holding adequate physical assets in the UAE. The CIGAs for the holding company Businesses are the activities related to acquiring and holding shares or equitable interests in other companies.
Holding Company Business as per Economic Substance Regulations
A Holding Company Business is defined under
Article 1 of the ESR Law defines Holding Company Business as,
- A business which is a Holding Company as per the definition of the relevant law applicable to the Licensee that is engaged in such activity
- A business whose primary function is acquiring and holding shares or equitable interests in other companies
- A business that doesn’t conduct any other commercial activity
The UAE ESR rules specify that the equity shares may encompass shares in a company and interests in an incorporated partnership. It could also include any other instrument that grants the Licensee a beneficial ownership interest in the company.
A Licensee needs to meet reduced ESR test requirements if its business activity is limited to engaging in Holding company business. However, if the UAE business does not meet the narrow definition of a Holding Company Business because it either carries on another activity; and/or owns other forms of investments or assets (e.g. interest-bearing loans), it may be required to meet the increased economic substance requirements under Article 6.2 of the Regulations if the other activity or asset brings the UAE business within the scope of a different Relevant Activity category (e.g. Lease-Finance), and the Licensee derives gross income from such other Relevant Activity.
Core Income-Generating Activities of a Holding Company Business
The CIGAs of Holding Company Businesses are activities related to the acquisition and holding of shares or equitable interests in other companies. However, such activities should not constitute another Relevant Activity, in which case, the CIGAs shall be those related to that other Relevant Activity.
ABC LLC is a UAE company whose only business activity is holding shares in four subsidiaries. However, ABC LLC is held by the regional holding company of the group headquartered in Paris. ABC LLC’s only gross income is the annual dividends it earns from the subsidiaries. The ESR law considers ABC LLC as carrying out the holding company business even though its shares are held by another holding company in the group.
DEF LLC is a food products manufacturing company in the UAE and holds shares in another company named GHI LLC which runs a restaurant. DEF LLC holds the shares of GHI LLC and earns gross income in the form of dividends, but it doesn’t need to meet the UAE Economic Substance Test as its core business is food products manufacturing. DEF LLC & GHI LLC doesn’t come under the UAE ESR rules as food product manufacturing and restaurant business are not defined as Relevant Activity under the ESR.
A UAE company named PQR LLC holds 100% shares in two subsidiary companies and has granted an interest-bearing loan to one of those subsidiaries. PQR LLC earns both annual dividends as well as income from the interest. In this case, PQR LLC is subject to the ESR rules under the Lease-Finance Business only and is not considered as carrying out Holding Company Business.
BBQ LLC acts as trustee to a number of unconnected trusts, holding assets in its capacity as trustee. As BBQ LLC is in the business of providing trustee services and is not the beneficial owner of the assets, BBQ LLC will not be considered a Holding Company Business.
Why Choose Jitendra Chartered Accountants?
Meeting the Economic Substance Test has become a regulatory compulsion for all the offshore, free zone and mainland companies that conduct one or more Relevant Activities in the UAE. The companies that conduct the Holding Company Business in the UAE need to meet the Economic Substance Test in relation to the activity. Failing to meet the test attract penalties and other actions such as sharing information with the competent authority. To avoid such unforeseen events the companies need to re-assess their corporate governing structure and come out with remedial measures to meet the Economic Substance Test in the UAE. Since this is a daunting task companies need to avail the services of professional ESR consultants in Dubai such as Jitendra Chartered Accountants (JCA).
JCA has highly qualified auditors and business setup consultants who possess sound knowledge of the ESR rules. JCA assists the companies in complying with the UAE ESR requirements and helps them avoid fines and other actions. JCA offers the following specific ESR services in the UAE,
- Assist the companies in assessing whether they can meet the UAE Economic Substance Test
- Suggest Recommendations if the companies fail to meet the ESR test
- Help the companies file the annual ESR Return