The Economic Substance Regulations (ESR) were introduced by the United Arab Emirates (UAE) in 2019 to ensure that companies conducting business in the UAE have a genuine economic presence and do not engage in artificial arrangements solely for tax purposes. The ESR require companies to meet specific requirements to demonstrate their economic substance in the UAE. This article will discuss the relevant activity and income criteria under ESR and how companies can comply with them.
Relevant Activity Criteria
The ESR apply to all companies that carry out “relevant activities” in the UAE. Relevant activities are those that are listed in the regulations, and they include the following:
1. Banking Business: This includes businesses that are licensed to provide banking services, such as deposit taking and lending.
2. Insurance Business: This includes businesses that are licensed to provide insurance and reinsurance services.
3. Investment Fund Management Business: This includes businesses that are licensed to manage investment funds.
4. Lease-Finance Business: This includes businesses that are licensed to provide leasing and financing services.
5. Headquarters Business: This includes businesses that provide headquarter services to their affiliates or group companies.
6. Shipping Business: This includes businesses that operate ships for commercial purposes.
7. Holding Company Business: This includes businesses that hold shares or other equity interests in other companies and earn dividends or capital gains from them.
To comply with the ESR, companies engaged in relevant activities must meet the economic substance test. This test requires companies to demonstrate that they have an adequate level of personnel, physical assets, and operating expenditure in the UAE.
Income Criteria
In addition to the relevant activity criteria, the ESR also apply to companies that earn income from a relevant activity in the UAE. The regulations define “income” broadly to include all revenues, receipts, and gains that are generated from a relevant activity.
To comply with the ESR, companies must meet the following requirements with respect to their income:
1. The income must be derived from a relevant activity that is subject to the ESR.
2. The income must be generated in the UAE.
3. The income must be subject to tax in the UAE.
Companies that meet these criteria must also meet the economic substance test to comply with the ESR.
Compliance with the ESR is critical for companies operating in the UAE. Failure to comply with the regulations can result in penalties, fines, and reputational damage. Therefore, companies should take steps to ensure that they meet the relevant activity and income criteria under the ESR.
One way to ensure compliance is to engage a professional service provider with expertise in ESR compliance.
These providers can assist companies with the following:
1. Identifying the relevant activities that are subject to the ESR.
2. Conducting a review of the company’s operations to determine if they meet the economic substance test.
3. Developing a plan to meet the economic substance test.
4. Preparing and submitting the required reports to the regulatory authorities.
In conclusion, understanding the relevant activity and income criteria under the ESR is crucial for companies conducting business in the UAE. Companies engaged in relevant activities or earning income from such activities in the UAE must meet the economic substance test to comply with the regulations. Working with a professional service provider can help companies ensure that they meet the requirements of the ESR and avoid penalties and fines.
