What are the guidelines to comply with the banking business?
Explaining banking business activity in ESR.
Economic Substance Regulation or more popularly known as ESR was introduced everywhere to achieve compliance with the major regulatory bodies from the US and Europe, in efforts to offer minimal tax liabilities to the businesses and organizations. This will ensure that such organizations have access to the economic substance in the jurisdiction. The main criteria for ESR applicability on such organizations are that they should be carrying out specific types of business activities.
These business activities primarily include:
- Insurance Business
- Lease - Finance Business
- Investment Fund management Business
- Holding Company Business
- Headquarters Business
- Intellectual property Business (“IP")
- Shipping Business
- Distribution and Service Centre Business, and
- Banking Business.
UAE has issued the ESR on 30th April 2019, which is applicable since the FY starting from the start of January 2019. So, all the business organizations carrying out any relevant activity have to submit a Notification form on an annual basis to their respective authority. But many of the organizations which are involved in such relevant activities are paranoid in the approach to go with the program. So we’ll be breaking down everything so that the process becomes extremely clear.
What are the rules for identifying whether a business carries out relevant activity?
If any organization is caught in the dilemma of whether their activities fall in the list of the relevant activities, then they must refer to schedule 1 of the Ministerial Decision 100, for good.
Say, an organization that has been doing the following activities is liable to fall under the relevant activities criteria of the banking business:
- Accepts deposits of withdrawable money, or repayable on the demand after notice or tenure which is fixed.
- Use partial or entire deposits for making investments or giving advances/ loans/ overdrafts/ guarantees or similar facilities
If the organization carries out any such activity they are falling under the ESR, and they have to submit the mandatory annual notification. So the first and foremost issues of the businesses, that whether they fall in the category, are resolved after using this link of MOF Webiste here
Banking businesses core income-generating activities, as per ESR:
- Anticipated to lend the customer deposits and available funds to lend other people or invest.
- Should be highly regulated via regulators and supervisors of regulations framed.
- Licensees should perform and oversee the reporting related functions.
- Reducing risky taking or squaring off positions, with activities and decisions to take place in UAE, to be demonstrated by Licensee
- Apart from the activities described above, such organizations can also issue bonds or even go to the money markets.
- Ensuring the capital of the licensee is not eroded and costs of funds are controlled, with the key functions and activities expected to be carried out in the UAE.
Definitions of other relevant activities covered under ESR are discussed in detail in Schedule 1. The business doesn't need to be actively engaged in any relevant business category. Also, the licensees can undertake more than one business activity, for which, they have to show economic substance for each relevant activity. In the following activities, consolidated reporting is permitted:
- Banking business
- Distribution and Service Centre business
- Headquarters Business
- Lease-Financing business
Passing ESR Test – When and who has to demonstrate substance?
To pass the economic Substance Test, the Licensee has to demonstrate the following, in every financial period:
- Relevant activity and Licensee are being directed and managed in the UAE
- Adequacy of premises, expenditure and people maintained by Licensee
- Core Income activities are being carried out in the UAE
The assessment of whether a licensee undertakes a relevant activity is needed to be carried out for each financial period starting on or after 1 Jan 2019. It should take all the activities into consideration that are carried out by the licensee in that financial period. Such licensees have to appear for the Economic Substance Test, whether they get all their income from abroad or within UAE (Except- Foreign Branch of a UAE entity earning from relevant activity, as they have a different process).
If he/she/ they don’t undertake any relevant activity in a financial period, then there is no requirement to pass the ESR Test, and thus not required to submit an Economic Substance Report for that period.
If he/she/ they carry out any of the relevant activity in a financial period but didn’t receive any income, then, they are also not required to appear for the Economic Substance Test. But, they will be required to submit a Notification on the Ministry of Finance filing portal.
What is an appropriate substance?
Businesses vary in size and their incomes apart from nature. So, following that, The Economic Substance Regulations clearly state that there is no “minimum” standard for the terms “adequate” or “appropriate”.
FTA goes with a realistic approach while assessing the Economic Substance Test, considering whether the relevant activities have fluctuated in the respective financial year.
Here are some important takeaways:
- UAE Tax residency Certificate isn’t proof of meeting the Economic Substance Test for the carried relevant activity
- Employees who carry out the CIG (Core Income Activity) have to be a resident in the UAE. In other cases, they have to carry out activity while being physically present in the UAE, under the Licensee directions and the licensee bearing the relevant costs of the individual.
- An adequate number of board meetings need to be held in UAE by the Licensee, with signed and maintained meeting minutes and board of directors with necessary skills and expertise to carry out their duties; present in UAE. In the case of a holding company, the business is not required to be directed and managed in the UAE, except it is required by the relevant licensing authority.
We have published a explanatory Guide on What ESR is? and how to file ESR in the UAE?. All Licensees and the exempted licensees have to file a Notification within the six months of the respective financial period, if they have carried out any relevant activity which has garnered them income, with notifications filed on the Ministry of Finance filing portal. If the businesses feel that they are still stuck, they can connect with the leaders in the Domain NSKT Global for assistance from their highly experienced experts. NSKT Global being one of the top firms in UAE dealing in ESR filling helps and assists in all areas related to ESR.