The UAE’s business environment is booming, and simply registering a company isn’t enough anymore. The Economic Substance Regulations (ESR) are here to make sure companies are truly operating and contributing to the UAE’s economy. These regulations apply to both free zones and onshore businesses. By following the ESR, you’ll not only be compliant, but you’ll also demonstrate your commitment to the UAE’s growth and showcase that your business is here for the long haul.
What are Economic Substance Regulations (ESR)?
ESR is a set of rules that require businesses to actively perform their services and validate their economic presence in the UAE. These regulations are specified under the Cabinet of Ministers Resolution No. 57 of 2020. Only businesses engaged in certain “Relevant Activities” are subject to ESR compliance.
According to Article No. 3 of Resolution No. 57, the following activities are classified as relevant and thus fall under the scope of ESR:
- Intellectual Property Business
- Shipping Business
- Headquarters Business
- Investment Fund Management Business
- Banking Business
- Service Centre Business
- Holding Company Business
- Lease/Finance Business
- Insurance Business
Businesses engaged in any of these activities must comply with ESR requirements, which include annual ESR filing and reporting.
Core Income Generating Activities (CIGAs)
CIGAs are the primary activities carried out by a licensee to generate income from their relevant activities. Here’s a breakdown of CIGAs for each relevant activity:
- Banking Business
The banking sector under the ESR must demonstrate active engagement in various core activities. These include raising funds, managing risks related to credit, currency, and interest rates, and taking hedging positions to mitigate financial uncertainties. Banks are also required to provide financial services such as loans and credit facilities to customers, manage their capital effectively, and prepare comprehensive regulatory reports. The UAE Central Bank, along with competent authorities in Financial Free Zones, oversees the regulatory compliance of banking businesses.
- Insurance Business
Insurance companies operating in the UAE must adhere to ESR by engaging in activities like predicting and calculating risks, providing insurance and reinsurance services, and underwriting insurance policies. These core functions ensure that the insurance businesses generate substantial economic activity within the country. The regulatory framework for insurance businesses is maintained by the Insurance Authority and the competent authorities in Free Zones and Financial Free Zones.
- Investment Fund Management Business
Investment fund management companies need to perform several critical activities to comply with ESR. These activities include making informed decisions on holding and selling investments, calculating risks and reserves, managing currency and interest rate risks, and preparing detailed reports for investors and regulatory bodies. These businesses fall under the supervision of the Securities and Commodities Authority, as well as competent authorities in Free Zones and Financial Free Zones.
- Lease-Finance Business
Lease-finance businesses must engage in a range of core activities, such as agreeing on funding terms, acquiring and leasing assets, setting terms and durations for financing or leasing agreements, monitoring and revising these agreements, and managing associated risks. These activities ensure that lease-finance businesses generate sufficient economic substance. The UAE Central Bank and the competent authorities in Free Zones and Financial Free Zones oversee these businesses.
- Headquarters Business
Headquarters businesses are required to perform essential management functions to comply with ESR. These include making significant management decisions, incurring operating expenditures on behalf of group entities, and coordinating group activities. These core functions ensure that the headquarters provides substantial economic contribution. The Ministry of Economy, along with competent authorities in Free Zones and Financial Free Zones, regulates headquarters businesses.
- Shipping Business
Shipping businesses must undertake various core activities to demonstrate economic substance, such as managing crew (hiring, paying, overseeing), overhauling and maintaining ships, overseeing shipping operations, and managing orders, and deliveries, and organizing voyages. These activities ensure that shipping businesses contribute significantly to the UAE economy. The Ministry of Economy and competent authorities in Free Zones and Financial Free Zones oversee the regulatory compliance of shipping businesses.
- Holding Company Business
Holding companies must manage activities related to their core functions, which include overseeing and managing their subsidiaries and investments. These companies must ensure they perform these activities to demonstrate a substantial economic presence in the UAE. If your holding company is in any Free Zones such as the Abu Dhabi Global Market (ADGM) or Dubai International Financial Centre (DIFC), you should also comply with the ESR. The Ministry of Economy and competent authorities in Free Zones and Financial Free Zones regulate holding company businesses.
- Intellectual Property Business
Intellectual Property (IP) businesses must engage in specific core activities depending on the type of IP assets they hold. For patents or similar assets, activities include research and development, while for marketing intangibles, the focus is on branding, marketing, and distribution. In exceptional cases, strategic decision-making and risk management related to the development and exploitation of IP assets are required. The Ministry of Economy and competent authorities in Free Zones and Financial Free Zones oversee these businesses.
- Distribution and Service Centre Business
Businesses in the distribution and service center sector must perform key activities such as transporting and storing goods for sale, managing inventories, taking orders, and providing consulting or administrative services. The Ministry of Economy and competent authorities in Free Zones and Financial Free Zones regulate these businesses.
By understanding and adhering to these core activities, businesses can ensure they meet the ESR requirements and maintain compliance with UAE regulations, thereby contributing to the country’s economic growth and stability.
Streamline your Economic Substance Regulation compliance with MS’s expert guidance
Uncertain about the UAE’s Economic Substance Regulations (ESR)? MS can be your single-source solution for smooth compliance. Fretting over deadlines and penalties can hold your business back. MS simplifies ESR for you. Our services cover everything: from identifying if your business even needs to file, to handling the entire filing process efficiently. With MS as your partner, a team of ESR experts ensures your filings meet all requirements. This not only minimizes the risk of penalties but also gives you the peace of mind to focus on growing your business. Don’t let ESR become a hurdle – let MS guide you through the process with confidence.