Is your business subject to the ESR?
What is the ESR
The ESR regulations require certain companies in the UAE to maintain and demonstrate adequate economic presence in the UAE in respect of their business activities.
Relevant Activities Assessment
The Relevant Activities assessment is what determines whether your business is subject to the Economic Substance Regulations (ESR).
Businesses must use a ‘Substance over form’ approach to examine their activities beyond what stated in the business license to the actual activities carried out, according to the ESR guidance and regulations issued by the ministry of finance.
Below is a summary that would help you understand the Relevant Activities and to identify if your business performed such activities.
Distribution and Service Centre Business
A UAE would be considered in a distribution or service center business if it carries out any of the following businesses:
- Purchasing from a Foreign Connected Person (e.g., a parent or a subsidiary company) components parts, materials, or finished goods, and reselling such components
- Providing services to Foreign Connected Persons (e.g., a parent or a subsidiary company)
Headquarters is the business of providing any of the following services to one or more Foreign Connected Person (e.g., a parent or a subsidiary company) by the Licensee.
- The provision of senior management.
- The assumption or control of material risk for activities carried out by, or assets owned by, any Foreign Connected Person.
- The provision of substantive advice in connection with the assumption or control of risk referred to herein above.
Most of the businesses subject to ESR will fall under the above categories, Distribution & Service Center and Headquarters Business.
Example: a UAE company that provides services to, or buy goods from, its parent, subsidiary, or any other related company outside the UAE.
If your business is part or a foreign group, or has a related party or a sister company through any kind of control, direct or indirect ownership, it would probably be subject to the ESR.
Lease-finance business is offering credit or financing to related or unrelated parties for a consideration. The normal trade-credit arrangement is not a Lease-Finance Business, as the credit is not offered with the intention of generating interest, but rather to facilitate the trading business
Holding Company Business
This is a business that:
- Has as its sole function the acquisition and holding of shares or equitable interests in other companies.
- Only earns dividends and capital gains from its equitable interests.
Intellectual Property Business
A business which holds, exploits, or receives income from the Intellectual Property Asset(s).
Investment Fund Management Business
Investment Fund Management Business shall have the meaning as set out in the law governing such activity in the State.
Banking Business is accepting deposits and using it to make loans or investments “commercial bank”
Insurance Business shall have the meaning as set out in the law governing such activity in the State (insurance company)
Shipping Business is any activity involving the operation of a Ship anywhere in the world other than within the territorial waters of the State.
An entity is not required to be actively engaged in any of the above business categories for it to be considered as carrying on a Relevant Activity. Any form of passive income from a Relevant Activity would bring the entity within scope of the ESR Regulations.
Assessing Relevant Activities is a continuous obligation for businesses in the UAE. If an entity carried out any Relevant Activity during any financial year it must comply to the Economic Substance Regulations.
An entity can undertake more than one Relevant Activity during the same financial period. This would require the entity to demonstrate economic substance in respect of each Relevant Activity
For a detailed discussion on how to determine whether you conduct a Relevant Activity, or how to meet the ESR requirements, please feel free contact us for a free consultation. ([email protected])