ESR Test Compliance
Entities in the UAE generating income from any Relevant Activity outlined in the Economic Substance Regulations (ESR) must meet the Economic Substance Test. Companies must meet the Economic Substance Test to demonstrate they have adequate substance in the UAE relating to the Relevant Activities provided under the ESR.
UAE companies need to conduct an assessment to determine the gaps in their existing substance and the substance required to meet the Economic Substance Test. Our team of ESR consultants can help UAE companies meet the Economic Substance Test.
Key Principles of Economic Substance Test
Key Principles of Economic Substance Test
We can provide you with a robust ESR strategy to meet the Economic Substance Test and demonstrate adequate substance in the UAE. The following are the key principles:
Core Income Generating Activity (CIGA) Test
Carry out core activities in the UAE.
Outsourcing of CIGA is permitted under certain conditions.
Directed and Managed Test
Businesses need to be directed and managed in the UAE by:
Conducting board meetings in the UAE with documented minutes.
Having a UAE-based manager and/or directors.
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Adequacy Test
Businesses in the UAE need to have:
An adequate number of qualified employees.
Annual operating expenditures in the UAE.
Consequences of Not Meeting the ESR Test
Failing to fulfil the Economic Substance Test may lead to serious consequences such as:
Penalties up to AED 400,000.
Risk of trade license suspension, withdrawal, or non-renewal.
Authorities deeming the company lacks substance, leading to adverse tax impacts.
Risk Mitigation Plan to Avoid ESR Test Failure
Our ESR consultants can help companies in the UAE develop strategies to meet the Economic Substance Test. Key steps include:
Ensuring core income-generating activities are conducted in the UAE.
Holding adequate board meetings in the UAE and documenting minutes.
Appointing directors with the necessary skills and expertise to make strategic decisions related to the Relevant Activity.
Ensuring directors are physically present in the UAE.
Maintaining an adequate number of qualified employees, premises, and operating expenditures in the UAE with respect to the Relevant Activity.
Ensuring adequate “supervision and control” for outsourcing arrangements. (Outsourced CIGA must be conducted in the UAE.)
Our Role in Assistance for Economic Substance Test
Performing a gap analysis to identify differences between your company’s current substance and the required level of substance.
Suggesting remedial measures to ensure compliance with the Economic Substance Test and ESR requirements.
Advising on documentation of Relevant Activities that are “directed and managed” from the UAE.
Providing guidance on the appropriate level of adequacy needed in management and operational activities.
Why Should UAE Businesses Hire ESR Services?
Extensive experience in the financial advisory industry.
In-depth knowledge of UAE ESR laws and regulations.
Practical expertise in helping clients meet ESR requirements and avoid fines.
Customer-focused approach.