What is the ESR?

Economic Substance Regulations (ESR) in the UAE mandate that certain companies maintain and demonstrate adequate economic presence within the country based on their business activities.

Relevant Activities Assessment

The Relevant Activities assessment determines whether your business is subject to ESR. Businesses must adopt a ‘Substance over form’ approach, examining activities beyond what is stated in their business license to the actual activities performed, per ESR guidance and regulations issued by the Ministry of Finance.

Relevant Activities

Below is a summary to help you understand and identify if your business performs any Relevant Activities:

Distribution and Service Centre Business

A UAE entity is considered engaged in a distribution or service center business if it:

• Purchases components, materials, or finished goods from a Foreign Connected Person (e.g., a parent or subsidiary company) and resells these components.
• Provides services to Foreign Connected Persons (e.g., a parent or subsidiary company).

Headquarters Business

A headquarters business involves providing the following services to one or more Foreign Connected Persons (e.g., a parent or subsidiary company):

• Provision of senior management.
• Assumption or control of material risk for activities carried out by, or assets owned by, any Foreign Connected Person.
• Provision of substantive advice related to risk assumption or control.

Most businesses subject to ESR will fall under the Distribution & Service Center and Headquarters Business categories.

Example: A UAE company providing services to or purchasing goods from its parent, subsidiary, or any related company outside the UAE.

If your business is part of a foreign group, or has a related party or sister company through any form of control, direct or indirect ownership, it is likely subject to ESR.

Lease-Finance Business

A lease-finance business offers credit or financing to related or unrelated parties for a consideration. Normal trade-credit arrangements are not considered lease-finance businesses, as they facilitate trading rather than generating interest.

Holding Company Business

A holding company business:

• Acquires and holds shares or equitable interests in other companies as its sole function.
• Only earns dividends and capital gains from its equitable interests.

Intellectual Property Business

A business that holds, exploits, or receives income from Intellectual Property assets.

Investment Fund Management Business

Defined according to the laws governing such activities in the UAE.

Banking Business

A business accepting deposits and using them to make loans or investments, such as a commercial bank.

Insurance Business

Defined according to the laws governing such activities in the UAE.

Shipping Business

Any activity involving the operation of a ship anywhere in the world, excluding within the UAE’s territorial waters.

Important Considerations

• An entity does not need to be actively engaged in the above business categories to be considered as conducting a Relevant Activity. Passive income from a Relevant Activity brings the entity within the scope of ESR.
• Assessing Relevant Activities is a continuous obligation. If an entity performs any Relevant Activity during any financial year, it must comply with ESR.
• An entity can undertake more than one Relevant Activity during the same financial period, requiring it to demonstrate economic substance for each Relevant Activity.

Let’s Talk

For a detailed discussion on determining whether you conduct a Relevant Activity or how to meet ESR requirements, please contact us for a free consultation at tax@audiix.com.