FAQ on ESR
(All you need to know)
A “Distribution and Service Centre” Business refers to two distinct activities that are covered under one “Relevant Activity” heading.
A UAE entity is considered engaged in a Distribution Business if it:
- Purchases goods from a Foreign Connected Person; and
- Distributes those goods
A UAE entity is considered engaged in a Service Centre Business if it:
• Provides services to a Foreign Connected Person
Does a business that purchases goods from a foreign group company and sells such goods (in or outside the UAE) fall within the scope of a Distribution and Service Centre Business, if the goods are directly dispatched to the customer by the foreign group company?
Yes, the amended definition of a Distribution and Service Centre Business would apply in such cases, as the goods are no longer required to be imported into the UAE, meaning “bill-to-ship” transactions may fall within the scope of the Regulations as a Distribution and Service Centre Business.
Further, the removal of the requirement for the goods to be resold outside the UAE, means that the local distribution of goods (purchased from a foreign group company) would also be within the scope of the Regulations as a Distribution and Service Centre Business..
A UAE entity is considered engaged in a Holding Company Business if it:
- Only holds equity interest(s) in juridical person(s); and
- Only earns dividend and capital gains from its equity interest(s)
A UAE entity that holds other assets or earns other forms of income will not be considered a Holding Company Business.
No, an investment fund is not considered a Holding Company Business
All of the following conditions must be met for an IP Business to be considered as “High Risk”:
- The Licensee did not create the IP asset which it holds for the purposes of its business;
- The Licensee acquired the IP asset either from:
- a Connected Person, or
- in consideration for funding research and development by another person situated in a country other than the UAE;
- The Licensee:
- licenses the IP asset to one or more Connected Persons, or
- Otherwise generates income from the asset in consequence of activities performed by Foreign Connected Persons
The increased substance requirements (in addition to those set out under Question 12) require a High Risk IP Licensee to demonstrate that it has (and historically had) a high degree of control over the development, exploitation, maintenance, protection, and enhancement of the IP Asset, and to submit proof that:
- It has adequate full-time employees with the necessary qualifications that permanently reside and perform their activities in the UAE – relevant employee information (e.g. experience, contracts, qualifications etc.) would need to be provided; and
- It has a business plan showing the reasons for holding the IP in the UAE; and
- Relevant decision making has and continues to take place in the UAE
A UAE entity is considered engaged in a Lease-Finance Business if it offers credit or financing for any kind of consideration. Providing credit includes making loans and entering into other financing arrangements such as hire purchase agreements and finance leases.
Offering credit or financing includes making loans to related or unrelated parties, entering into finance leases in relation to assets other than land, and providing credit in the form of hire purchase agreements, long term credit plans, and other types of financing arrangements.
Yes, a UAE entity that makes a loan or provides any other form of credit to a UAE or foreign group company for consideration (e.g. interest) will be considered engaged in a Lease-Finance Business.
Consideration includes interest, origination and processing fees, gains upon conversion of a loan into the share capital of the debtor, and late payments penalties. The grant of security in favour of the lender would not constitute consideration.
A UAE entity that provides discretionary investment management services to Investment Funds located in the UAE or in a different jurisdiction. An Investment Fund Management Business includes making discretionary investment, divestment and risk related decisions on behalf of an investment fund. UAE entities providing other types of investment fund related services such as fund administration, investment advisory and custodian services are not considered engaged in an Investment Fund Management Business.
A UAE entity that provides services to other foreign group entities, and through the provision of such services:
- Has taken on the responsibility for the overall success of the group; or
- Is responsible for an important aspect of the group’s performance
Do entities providing Headquarter Business to other group entities in UAE comply with Economic Substance Regulations?
No, providing Headquarter Business to group entities within UAE is not covered for the purpose of ESR.
No, a group’s corporate structure is not relevant in determining whether a UAE entity within the group is engaged in a Headquarter Business. Whether an entity is engaged in a Headquarter Business is entirely dependent on the nature of the services provided to foreign group companies.
Can an entity be considered engaged in a Headquarter Business in addition to carrying on another Relevant Activity?
Possibly, if the Relevant Activities form two or more distinct business activities. However, if an activity that might otherwise fall within the definition of a Headquarters Business forms part of another main Relevant Activity of the Licensee, the Licensee would not be considered to also be engaged in a Headquarter Business. For example, a UAE entity that undertakes captive insurance activities will not be considered to carry on a “Headquarter Business” simply because it assumes material risk on behalf of the group.