Economic Substance Regulations in the UAE: Key Requirements and Implications
Lately, the UAE has introduced the Economic Substance Regulations. The Economic Substance Regulations were enacted by the UAE to ensure that organizations carrying out certain activities within the territory have a real economic presence.
These rules which came into effect in 2019, require that UAE entities that take part in “Relevant Activities” of offshore companies and domestic and foreign branches of business and earn income from these activities have an appropriate level of economic activity and physical presence in the UAE. In short, this rule is adopted to demonstrate the participation of businesses in certain activities that reflect the company’s economic presence.
Goals of the ESR Legislation and its Implementation in the UAE
The major motive for imposing the ESR rule is to follow global best practices on taxation and eradicate the manipulation of the tax regime in the United Arab Emirates. With these limitations, the UAE aims to prove that all ventures that are set up within its authority have a financial presence and carry out business activities.
To prove such, the entities should conduct Core Income Generating Activities administered in the United Arab Emirates, be “directed and managed” in the UAE, and maintain a requisite number of qualified full-time employees, operational costs, and physical assets in the country.
Specific areas such as banking, insurance sector, investment fund management, leasing financing, holding companies, head offices, management of intellectual property, and distribution and service center operations are just a few of the relevant activities covered by the ESR.
Business Sectors That are Affected by Economic Substance Regulations
Banking & Insurance Sector
Banking and Insurance Sectors are some of the most risky spaces where there is a high chance of financial mishaps. These ventures should conduct the CIGAs to tackle any financial loss. Also, they need to arrange meetings and maintain their best workers and office spaces.
These corporations are obliged to adhere to the licensing provisions laid down by organizations such as the Insurance Authority or Free Zone Authority, whether onshore or in free zones, and also submit documents to show conformity with the ESR requirements.
Finance for Shipping and Leasing
The lease-finance industry should accomplish CIGAs including accepting financing terms, purchasing assets for leasing, and assessing finance terms or leasing. There is also the management of risks in the United Arab Emirates. Shipping businesses must perform their domestic CIGAs and management operations.
Centers of distribution and services
The distribution and service centers shall conduct CIGAs regarding the transportation and storage of products, stock management, order processing, consultancy, or any other services conducted within the United Arab Emirates, with proof of the said through relevant paperwork.
Corporate Offices and Related Enterprises
Holding companies and headquarters shall ensure that the United Arab Emirates is a headquarters country. Group companies shall obtain intensive services from headquarters, including coordination of group activities and appropriate management decisions.
Key Requirements and Implications
- Groups engaged in “Relevant Activities” are required to comply with the ESR. In that regard, they ensure that CIGAs are relevant and relevant to the business. For example – a shipping company must manage the shipping activity operations and staff management highly.
- A headquarters company must therefore focus on coordinating group operations and strategic management decisions. People operating investment fund management companies have to deal with issues related to risk analysis and key investment decisions. For a banking company, risk management and capital raising are crucial activities.
- Businesses operating with a distribution and service center must have strong controls over the processing of orders and logistics. Leasing or financing businesses should pay attention to asset management and the provision of funding plans. Insurance businesses carry on risk evaluation as well as all types of insurance provision.
- Organizations are mandated to file annual returns to the regulatory authority over their compliance with the ESR. This means establishing if the activities for that accounting year have generated any profit or not.
- All companies that plan to comply with the ESR regulations must demonstrate that they are governed and are being run in the United Arab Emirates. To achieve this, these must hold a specific number of board meetings. One should have directors who are well-informed and seasoned to undertake their work effectively.
At Markai, we help businesses fulfill the key requirements and implications of the Economic Substance Regulations and understand the taxation systems. Reach out to MarkAi Corporate Services and attain long-term business success.