ESR Unveiled: A Comprehensive Guide to Relevant Activities, and Assessment of economic substance in the UAE

June 10, 2024 | 5 min read

On 30 April 2019, the Economic Substance Regulations were issued by the United Arab Emirates in accordance with the Cabinet of Minister Resolution Number 31 of 2019. Moreover, assistance for the application of ESR regulation UAE was also proposed on 11 September 2019 in accordance with Ministerial Decision Number 215 of 2019. Amendments to the ESR Regulations UAE were made on 10 August 2020 by Cabinet of Minister Resolution Number 57 of 2020, and assistance for the application of those amended ESR regulations was issued on 19 August 2020 by Cabinet of Minister Resolution Number 100 of 2020. ESR maintains and illustrates the economic presence of onshore and free zone companies who practice any of the “Relevant Activities” listed under in the UAE relative to the Economic Substance Test.

The Relevant Activities include:

  1. Banking Business
  2. Insurance Business
  3. Investment Fund Management Business
  4. Lease-Finance Business
  5. Shipping Business
  6. Holding Company Business
  7. Intellectual Property Business
  8. Headquarter Business
  9. Distribution and Service Centre Business

Entities are expected to use a ‘substance over form’ approach to determine whether or not they undertake a Relevant Activity and as a result will be considered Licensees for the purposes of the ESR Regulations, irrespective of whether such Relevant Activity is included in the trade licence or permit of the entity.

Banking Business:

This refers to the business of accepting deposits of money which may be withdrawn, or that are repayable on demand or after a fixed period, or after notice, by cheque or otherwise. This also refers to the business of using such deposits, either in whole or in part, in the making or giving of loans, advances, overdrafts, guarantees or similar facilities or in making of investment for the account and at risk of the Licensee.

Insurance Business:

This refers to the business of accepting risks by effecting or carrying out contracts of insurance, in both the life and non-life sectors, including contracts of reinsurance and captive insurance arrangements.

Investment Fund Management Business:

This refers to the business of providing discretionary investment management services to domestic or foreign investment funds.

Lease-Finance Business:

This refers to the business of providing credit of financing for any kind of consideration. It includes the following:

  1. Making loans to related or unrelated parties
  2. Entering into finance leases in relation to assets other than land
  3. Providing credit in the form of hire purchase agreement, long term credit plans, and other types of financial arrangement.
  4. Consideration can mean interest, but also any other type of financial arrangements

Shipping Business:

  1. This refers to the business of operating one or more Ships in international traffic, for the transport of either passengers, cargo or both.
  2. What is not considered as Ship:
    1. Vessels used for fishing
    2. Vessels that are small ( tonnage does not exceed ten tonnes)
    3. Leisure vessels (for example – cruise ship and private yachts)

Holding Company Business:

    1. This refers to the business that meets both the following conditions:
      1. It has the acquisition and holding of shares or equitable interests in other companies as its sole function
      2. It only earns dividend and capital gains from its equitable interests.

Intellectual Property Business:

  1. This refers to the business that holds, exploit, or receives separately identifiable gross income from intellectual Property Assets (IP Assets) in form of royalties, License fess, franchise fees, capital gain and any other income from the sale or exploitation of the IP Asset.
  2. Example of IP Assets include:
    1. Copyright
    2. Patents
    3. Trademarks
    4. Brands
    5. Technical know-how

Headquarter Business:

    1. This refers to the business that provides services to foreign group companies, and through the provision of such services, it takes on the responsibility for the overall success of the group or is responsible for an important aspect of the overall group’s performance.

Example of such services, referred to as HQ Services, include the following:

  1. The provision of senior management
  2. The assumption or control of material risk for activities carried out by foreign group companies
  3. The substantive advice in relation to the assumption or control of such risks.

Distribution and Service Centre Business:

Distribution Business:

  1. A business that purchase raw material or finished products from a foreign group company and distributes those raw material or finished goods.

Distribution Business:

  1. A business that provides consulting, administrative or other services to a foreign group company.

What are the economic substance requirements in the UAE?

An entity must satisfy the following key criteria to meet the Economic Substance Test in relation to any Relevant Activity carried on by it:

  1. Conduct relevant “core income-generating activities” in the UAE;
  2. Be “directed and managed” in the UAE in relation to that activity; and
  3. With reference to the level of activities performed in the UAE:
    1. Have an adequate number of qualified full-time employees in the UAE
    2. Incur an adequate amount of operating expenditure in the UAE
    3. Have adequate physical assets in the UAE

Reporting requirements under ESR

There are two levels of reporting for businesses falling within the scope of the Regulations.

ESR Notification:

All businesses performing a Relevant Activity, including businesses claiming exemption from ESR, are required to make a notification to the Ministry of Finance. The notification must be made within 6 months of the end of the licensee’s financial year, or expiry of trade license if the business does not have a financial year.

ESR Reporting:

Businesses that carry out a Relevant Activity are also required to submit an annual report. In this report, the business must confirm whether it meets the ESR tests. This is due 12 months from the end of the financial year.

Failure to comply would result in following administrative penalties:

  1. Failure to file notification – AED 20,000
  2. Providing inaccurate information - AED 50,000
  3. Failure to submit substance report - AED 50,000
  4. Failure to fulfil economic substance test – AED 50,00

How can MBG UAE help?

MBG UAE has a dedicated team of experts in Dubai who can assist clients with ESR.

Impact assessment

  1. Understanding the organisation’s structure and nature of business activities/transactions undertaken in the UAE in order to evaluate the applicability of the UAE ESR;
  2. Identifying whether the company’s business falls in the list of businesses/industries which the UAE ESR have prescribed;

Gap and remediation analysis

  1. Analysing the economic substance requirements based on relevant activity identified;
  2. Collating data with respect to the manner of conducting relevant activity, revenues booked, premises available, number of employees and so on;
  3. Identifying the gaps, in discussion with the management, basis study of facts and requirements;
  4. Highlighting corrective actions that may be taken (if any);

Compliance / Reporting 

  1. Assistance in ensuring timely compliance with the notification filing requirements of the UAE ESR and collating details required therein;
  2. Assistance in ensuring timely compliance with the reporting requirements of the UAE ESR and collating required details in the prescribed reporting form and related declarations.

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