What’s new?
On 3rd February 2020, the Abu Dhabi Global Market Authority (ADGM) organized an ADGM ESR Outreach Session in collaboration with the UAE Ministry of Finance.
The session provided some interesting updates and insight into ESR’s impact on ADGM structures.
See our previous articles on the subject:
UAE Economic Substance Law Briefing
UAE Economic Substance Regulation Update: Guidance Released
Key take-aways
Below are the key takeaways following the MoF clarifications, with M/HQ’s comments where appropriate:
- An entity will be deemed a “Licensee” for the purpose of ESR only if it is conducting a Relevant Activity.
- If an entity has not conducted a Relevant Activity during the relevant financial period, it will not be considered as Licensee for the purpose of ESR. It will, therefore, fall out of ESR scope and will not be required to notify its Regulatory Authority or submit an Economic Substance Return at the end of its financial period.
- Any Licensee which has conducted a Relevant Activity during its relevant financial period and has not generated income will fall out of ESR scope but will have to notify its Regulatory Authority. Such entity, however, will not have to submit an ESR Return at the end of its financial period. Typical examples of this type of entities are ADGM SPVs holding non-income generating assets, e.g. art piece, property not being rented.
- Foundations are not considered as exempted entities for the purpose of ESR and therefore may fall within scope unless not generating income during the relevant financial period.
- A flexi-desk or registered address arrangement with 3rd party service providers are in principle compliant with ESR requirements vis-à-vis Holding Company Business (i.e. pure equity holding companies). The same arrangement may not be compliant vis-à-vis entities deploying other Relevant Activities; hence one must identify whether the flexi-desk or registered address arrangement is sufficient for the entity to conduct its activity in the UAE.
What’s next?
ESR took effect on 30 April 2019. There are a number of actions which relevant Licensees must be undertaking to ensure compliance – from clarifying their entity classification, to the structuring of contractual and delegation arrangements, the review and organization of their internal governance, their employment and premises arrangements and the capturing of relevant business information which will be required for the preparation and filing of reporting information to the Regulatory Authority.
Even entities not deploying a Relevant Activity should implement proper corporate governance mechanisms in order to avoid any risk of failing the Economic Substance Test.
If you operate a business in the UAE or hold shares in a UAE structure, we highly recommend that you take an active role in auditing your corporate arrangements with the view to bring in the necessary level of corporate substance.
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