UAE ESR: What are the CIGAs for Investment Fund Management Businesses
The Economic Substance Test in the UAE requires a Licensee to demonstrate that the Licensee is directed and managed in the UAE in relation to the relevant activity, Core Income Generating Activities (CIGAs) are carried out in the UAE, has adequate qualified full-time employees, incur adequate expenditure and has adequate physical assets in the UAE. Carrying out CIGAs is one of the key requirements for a Licensee to meet the Economic Substance test in the UAE. The ESR guideline has provided a list of CIGAs corresponding to each relevant activity including the Investment Fund Management Business.
Investment Fund Management Business as per Economic Substance Regulation
A company in the UAE is considered as carrying out the Investment Fund Management Business if it provides discretionary investment fund management services in relation to domestic or foreign Investment Funds. The activities under discretionary Investment Fund Management services include making investment, divestment, and risk-related decisions on behalf of an Investment Fund.
However, the services such as fund administration, custodian, investment advisory, and other Investment Fund related services don’t come within the scope of this definition, and the companies that provide those services are not required to meet the Economic Substance Test. Also, the Investment Fund itself is not considered an Investment Fund Management Business. In cases where an Investment Fund is structured as a partnership and has both a corporate General Partner and an Investment Fund Manager, only the Investment Fund Manager comes within the scope of the ESR rules.
Core Income Generating Activities of Investment Fund Management Business
1. Taking decisions on the Holding & Selling of Investments
This CIGA of investment and fund management companies involve independent consideration and deliberation regarding investment and divestment decisions. However, a company that merely implements the investment and divestment decisions of another entity without any prior independent consideration is not considered as undertaking this CIGA. Normally, all the directors or members of an investment committee may not be based in the UAE but the ESR rules mandate that a majority of the decision-makers must be physically present in the UAE when those significant decisions were made.
2. Calculating Risk and Reserves
A company that manages the investment fund has to undertake CIGA of identifying, measuring, monitoring, and controlling risks involved in the Fund’s operations and investments. The ESR rule takes into account the risk as a whole and not isolated risk calculations related to a single area of applicable risk. In short, this CIGA must consider all the relevant risks attributable to the investment fund on a holistic basis.
3. Making Decisions on Currency or Interest Fluctuations & Hedging Positions
The investment management involves determining if the investment fund is exposed to or entering into hedging arrangements against currency fluctuations and taking decisions with respect to those determinations. The Investment Fund Manager needs to conduct this CIGA on a holistic basis by taking into account the overall position of the Investment Fund. Isolated decisions applicable to specific investments are not adequate to meet this CIGA.
4. Preparing Reports to Investors or Government Authority
Investment Fund management involves the activity of preparing reports to investors or government authorities regarding the regulation of the business. However, this doesn’t mean the Licensee needs to perform the administrative task of preparing the routine annual or quarterly reports but should be able to oversee the work from the UAE. The Licensee should ensure that the necessary system is in place to supervise the administrative task of preparing the reports including the contractual agreement with any third-party administrator. Most importantly, the Licensee should shoulder the ultimate responsibility of reporting and should have the expertise to accurately tell the position of the Investment Fund at any given time.
Illustrating the CIGA for Investment Fund Management Business
ABC Fund is an Investment Fund registered with the Securities and Commodities Authority (SCA). ABC Fund is a limited partnership entity with ABC LLC (UAE) being the corporate General Partner. PQR LLC (UAE) has been appointed as the investment manager of the ABC Fund by ABC LLC. PQR LLC is handling the routine investment and decision making responsibilities of the ABC Fund. TVC LLC, a third-party administrator operating in the UAE, is managing the administrative tasks of the ABC Fund.
In this scenario, ABC Fund and ABC LLC are not carrying out the Investment Fund Management Business and don’t need to meet the ESR test. PQR LLC is considered as carrying out the Investment Fund Management Business as it carries out the discretionary investment management activities of the ABC Fund as its Investment Manager. Further, TVC LLC is also not undertaking the Investment Fund Management Business as it doesn’t provide discretionary investment management services.
Why Choose Jitendra Chartered Accountants?
The companies in the UAE are faced with the responsibility of meeting the Economic Substance test to demonstrate they have an adequate economic presence in the UAE in relation to the relevant activities they conduct in the UAE. The companies need to meet the economic substance test and performing the CIGAs is a key requirement for the test. The ESR law has set out a list of CIGAs in which the Licensees need to generate income in the applicable fiscal period. Failing to meet the ESR test will incur heavy penalties and therefore the companies in the UAE need the professional assistance of ESR service providers in Dubai such as Jitendra Chartered Accountants (JCA). JCA assists the companies in
- Assessing whether the companies can meet the ESR test
- Develop strategies in case the Licensee fails to meet the test
- File and submit the annual ESR Return