The UAE has applied the ESR to confirm that units working within its purview are involved in substantial economic activity.
The goal of these regulations is to meet international standards for fair taxation.
In order to achieve ESR, a business must classify and understand the relevant activities that fall within its area. In this article we will see the various relevant activities defined in the context of UAE ESR. By clarifying these relevant activities, businesses can guide the ESR landscape and ensure compliance while developing a robust and viable economic environment in the UAE.
What is the Economic Substance Standard?
When a company listed in the UAE carries out relevant activities, it defines whether the business unit is a licensee and falls within the scope of the ESR. Licensee is obliged to certify the following under the ESR;
- The relevant business activities carried out by the licensee are concentrated and completed within the UAE.
- CIGA (Core Income Generating Activities) is being agreed across the UAE.
- The licensee has suitable premises, staff and expenditures in the UAE.
Furthermore, to verify economic substance, the licensee is obliged to file an economic substance declaration for those financial years in which it receives any gross income from the relevant activity.
Below are details of some of the relevant activities and their central revenue-generating activities;
1) Bank business
The UAE’s ESR guidelines state that banking is a relevant activity. As, for businesses that accept cash deposits, withdrawals can be made upon request. Such businesses use credit to make loans, advance payments, overdrafts, guarantees, or make investments. Core Income Generating Activities (CIGA) under Banking include;
- Provision of loans, credit or other financial services
- Raise capital and manage risks such as credit, currency and interest rate risk
- take an evasive position
- Process funds and prepare reports to stakeholders or government agencies
It is also important to note that financial intermediaries involved in the buying and selling of domestic and foreign stocks and bonds or UAE financial institutions involved in currency exchange and remittance, exchange and supply are not considered banking as a relevant activity under the UAE ESR.
A licensee is considered to be engaged in headquarters business only if it provides services to other foreign group units and as a result:
- Take responsibility for the overall performance of the group
- Accountable for the major aspects behind the overall performance of the team.
For listed UAE businesses that are considered and measured as being responsible for the overall success or performance of the foreign group, the services provided by the UAE entity shall include;
- Provide top management
- Provide practical advice on the declaration or control of such material risks.
- A statement or control representing a significant risk to the group over its activities.
3) Insurance business
According to the ESR guidelines, the insurance business undertakes risk by entering into insurance agreements in the life and non-life insurance categories. This includes provision of supply contracts and captive insurance. CIGA under the insurance business includes;
- Anticipating and Calculating Risk
- Guarantee or reassurance against risk
- Provide insurance business services to customers
- Guarantee insurance and reinsurance
4) Investment fund management business
Under ESR-related activities, entities that provide optional investment management services such as investment, divestment and exposure are called investment fund management businesses. The activities under investment fund management business are;
- Make judgments on currency or interest rate changes and hedge positions
- Ruling on the holding and sale of investments
- Calculating Risk and Reserves
- Organization reporting to stakeholders or any government agency
5) Lease financing business
A UAE company providing credit or leasing is considered a lease financing business under ESR-related activities. Such businesses make loans and enter into finance leases for assets other than property. CIGA lease financing business includes;
- Set the relationship and duration of any lease
- Approval of funding terms
- deal with risk
- Classification and acquisition of leased assets
- review and amend any agreement
6) Holding company business
According to the ESR classification of related activities, a holding company business holds shares or equitable interests in other companies and does not carry out any other profitable activities.
For the holding company business that has completed the detailed definition of activities and has not carried out any other profit-making activities, it only needs to verify the concentrated economic substance. However, if the unit carries out other profitable activities and owns investments or assets. It requires verification of the UAE’s increased economic substance requirements. A CIGA holding company business is associated with holding shares in other companies.
Familiarity with activities related to ESR compliance in the UAE is fundamental for businesses to thrive in the jurisdiction. By thoroughly complying with regulations and meeting economic substance requirements, companies can avoid consequences and contribute to a clear and fair tax environment.Businesses can gain guidance from leading companies such as Economic Substance Regulations Has become a trusted partner. They provide inclusive assistance to deal with the complexities of ESR. Their wide-ranging capabilities have proven invaluable in establishing a strong presence in the UAE’s dynamic business environment.
This content is part of HWM Partnership.