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Economic Substance Regulations in the UAE

Relevant Activities Under Economic Substance Regulations in the UAE?

Table of Contents

The Economic Substance Regulations was introduced by the Organization for Economic Co-operation and Development (OECD) to determine that a business that is carrying on relevant activity in the UAE has economic substance. Thus, it is advisable for businesses to avail the services of trusted ESR Consultants in UAE to effectively determine their license activities in compliance with the Economic Substance Regulations. Article no. 3 of Cabinet of Ministers Resolution No. 57 of 2020 concerning Economic Substance Requirements has specified the following Relevant Activities:

  • Banking Business
  • Insurance Business
  • Investment Fund Management Business
  • Lease-Finance Business
  • Headquarters Business
  • Shipping Business
  • Holding Company Business
  • Intellectual Property Business
  • Distribution and Service Centre Business

Relevant Activities and Core Income Generating Activities

In accordance with Ministerial Decision No. 100 for the Year 2020, businesses operating in the UAE can use the substance over form method to determine whether or not they undertake a Relevant Activity, in order to ensure compliance with the Economic Substance Regulations. Moreover, the Economic Substance Regulations requires the Licensee or Exempted Licensee to conduct Core Income Generating Activities to generate the gross income from its Relevant Activity. Following are the Relevant Activities and their respective Core Income Generating Activities:

1. Banking Business

Banking Business means the business of conducting activities such as accepting deposits of money, providing investments, making or giving loans, and other financial services as defined by the Central Bank of the United Arab Emirates (CBUAE).

As per Economic Substance Regulations, following are the Core Income Generating Activities for a Banking Business:

  • fundraising and using advanced risk management strategies when providing financial services to customers.
  • to reduce the risk of loss by taking hedging positions.
  • providing customers loans, credit, or other financial services.
  • managing funds and creating reports for investors or the Regulatory Authorities

2. Insurance Business

Insurance Business is the business that provides financial protection and risk management services by underwriting insurance policies, assuming risks, and providing insurance and reinsurance related services.

As per Economic Substance Regulations, following are the Core Income Generating Activities for an Insurance Business:

  • calculating the costs and risks of the insurance and reinsurance contracts
  • offering clients with insurance business services by insuring or reinsuring against the calculated risks.
  • reviewing the risks of insurance and reinsurance contracts.

3. Investment Fund Management Business

Investment fund management business refers to the professional management and administration of investment funds on behalf of investors.

As per Economic Substance Regulations, following are the Core Income Generating Activities for an Investment Fund Management Business:

  • making investment holding and selling decisions.
  • estimating risk and reserves.
  • taking decisions on currency or fluctuations in interest rate, as well as hedging positions.
  • preparing reports that are directed towards investors or the Regulatory Authorities.

4. Lease-Finance Business

Lease-Finance Business refers to a type of economic activity where a company offers credit or financing in leasing activities, particularly the leasing of assets other than land.

As per Economic Substance Regulations, following are the Core Income Generating Activities for a Lease-Finance Business:

  • agreeing the type, quantum, currency and rates of interest of funding.
  • in the case of leasing, identifying and verifying suitable assets that are to be leased.
  • defining the terms and period of leasing activity.
  • monitoring the decision and amendments in the financing terms.
  • developing and implementing advanced strategies to manage any risks.

5. Headquarters Business

A Business within the UAE is considered as headquarters business as per Economic Substance Regulations if it provides services to foreign affiliated entities by being responsible for the success and performance of the group.

As per Economic Substance Regulations, following are the Core Income Generating Activities for a Headquarters Business:

  • taking relevant management decisions.
  • acquiring operating expenditures on behalf of a Group.
  • coordinating Group activities.

6. Shipping Business

A Shipping Business pertains to companies that are engaged in activities related to the operation of multiple ships in international waters. This business includes companies that are involved in transporting goods or passengers, maintaining and tracking shipping.

As per Economic Substance Regulations, following are the Core Income Generating Activities for a Headquarters Business:

  • managing crew members.
  • repairing and maintaining Ships.
  • supervising and tracking shipping.
  • determining and shipping of goods, organizing and supervising expeditions.

7. Holding Company Business

A Holding Company Business as per the Economic Substance Regulations refers to an individual that primarily holds and shares investments in other companies but does not carry out any independent commercial activities beyond this role.

8. Intellectual Property Business

An Intellectual Property Business is a business that receives, exploits, and licenses core income from the intellectual property assets, which includes patents, copyrights, trademarks, and other intangible assets.

As per Economic Substance Regulations, following are the Core Income Generating Activities for an Intellectual Property Business:

  • patent CIGA will be research and development.
  • intangible assets CIGA will be branding, marketing and distribution.

in exceptional cases,

  • Making strategic decisions and managing key risks associated with the development, purchasing by third parties and subsequent exploitation and protection of the Intellectual Property Asset.
  • carrying on the related trading activities through which the Intellectual Property Assets are exploited that generates revenue from third parties.

9. Distribution and Service Centre Business

As defined under the Economic Substance Regulations, the Distribution and Service Centre Business in the UAE undertakes distribution of finished goods or provision of services to a foreign group company.

  • transporting and storing component parts, materials or finished goods.
  • managing inventories.
  • taking orders.
  • providing consultations or other administrative services.

Avail the expert services of trusted ESR Consultants in UAE

It is advisable for businesses to avail the services of trusted ESR Consultants in UAE to effectively determine their license activities in compliance with the Economic Substance Regulations. Thus, feel free to contact us today and we shall be glad to assist you.

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