Economic Substance Regulations Activities – Guest blog

As per the Cabinet of Ministers Resolution No. 31 of 2019, the UAE introduced Economic Substance Regulations on April 30, 2019, to honor the UAE’s assurance as a member of the OECD (Organization for Economic Co-operation and Development). Twelve jurisdictions with UAE were essential to present economic substance requirements in their local regulations. Authorities that fail to apply significant activity requirements will be considered as Harmful tax jurisdictions. The key purpose of the Regulations is to ensure that the UAE engaged in relevant activities is not used to artificially appeal profits that are not proportionate with the economic activity started in the UAE.

What are the Economic Substance Regulations Activities?

Article no. 3 of Resolution No. 57 presents the following Economic Substance Regulations relevant activities. It also clarifies the Core Income Generating Activities of the businesses that perform the relevant activities as specified by the Economic Substance Regulations in UAE. Here are the Economic Substance Regulations Activities as per the regulation;

• Banking Business

As per Economic Substance Regulations, banking business states to accepting deposits from the public. It also offers credits or loans. This includes traditional banks. To comply, Banks have to;

• Validate satisfactory premises
• Full-time employees
• Sustain adequate operational expenses

Banks have to conduct core income-generating activities (CIGAs). It may include raising funds, handling risk, and giving loans and credit in the UAE.

• Insurance Business

Insurance businesses also fall under ESR relevant activities. It includes those that offer or accept contracts of insurance. To encounter ESR obligations, these entities have to prove they have significant actions in the UAE. This involves;

• Predicting and calculating risk
• Protecting or re-insuring against risk
• Providing client services in the UAE

• Investment Fund Management Business

This ESR relevant activity covers businesses handling investment funds. It involves making decisions on buying and selling investments. Fund managers have to show that their managerial and linked activities happen in the UAE. This comprises;

• Managing risks
• Providing support services

Compliance demands show that these activities are led by suitable full-time staff. Also, the business sustains noteworthy working expenditures in the UAE.

• Lease/Finance Business

Entities involved in offering credit services or financing for leasing property fall under the ESR activity of the lease-finance business category. It is mandatory to signify that the following core activities are occurring within the UAE such as;

• Approving funding terms
• Classifying and obtaining assets to be leased
• Setting the terms 
• Extent of leases
• Observing lease agreements

It is important to note that these businesses must have adequate physical presence, employees, and working outlays in the UAE.

• Headquarters Business

The Core Income Generating Activity of a Headquarters Business includes providing services to foreign group companies. They manage the group’s operations and make calculated decisions. These entities have to show that their headquarters activities are conducted in the UAE such as;

• Taking management decisions
• Incurring expenses on behalf of group entities
• Organizing group activities

• Shipping Business

The Core Income Generating Activity of a Shipping business shall be operating ships in global traffic, together with handling the crew, shipping, and management of cargo. Shipping businesses have to show some activities in the UAE such as;

• Supervision of crew management
• Maintaining ships
• Management of shipping operations
• Handling contracts

• Holding Company Business

The Core Income Generating Activity for the Holding company business includes almost all the activities that are part of this business. While holding companies have less strict requirements, they must still validate that they hold and handle equity interests within the UAE. They need to have satisfactory premises and employees in the UAE to conduct these activities in the UAE.

• Intellectual Property Business

The Core Income Generating Activity for Intellectual property business shall be to hold, exploit, or get income from intellectual property (IP) assets. These businesses have to show that activities such as;

• Researching and developing IP
• Marketing
• Branding
• Managing and enhancing IP rights

• Distribution and Service Centre Business

The Core Income Generating Activity for Distribution and Service Centre Business includes several activities for profit. These entities have to prove that their activities are carried out in the UAE such as;

• Transporting and storing goods
• Managing inventory
• Providing consulting 
• Offering Administrative services

Conclusion

If you want to start a business, you may face some challenges in the UAE regarding the laws and complexities of ESR. It is recommended to get guidance and assistance from top consultants such as Economic Substance Regulations. Their team can help you a lot to handle issues and address them on time so you can focus on other core zones.

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