Businesses in UAE are expected to use a ‘substance over form’ approach to determine whether or not they undertake a Relevant Activity and, as a result, are within the scope of the Regulations. This determination would require the business to not only consider the activities stated under their commercial license or registration certificate but also to assess the activities carried out during a financial period.
Holding Company Business
As per Article 1 of the ESR Regulations, a Holding Company Business is defined as a business that:
- Has as its sole function the acquisition and holding of shares or equitable interests in other companies; and
- Only earns dividends and capital gains from its equitable interests.
A Licensee will be regarded as carrying on a Holding Company Business only if it meets the above listed conditions.
Equity interests include shares in a company and interests in an incorporated partnership, as well as any other instrument which gives the Licensee a beneficial ownership interest in a company. The term dividends should be interpreted widely to mean any distribution of profits to the holder of shares or equitable interest in another company or incorporated partnership.
A Licensee whose activities are limited to being engaged in a Holding Company Business would only be required to meet the reduced economic substance requirements under Article 6.5 of the ESR Regulations.
A UAE business that does not meet the narrow definition of a Holding Company Business because it either;
- carries on another activity; and/or
- owns other forms of investments or assets like interest-bearing loans.
Such Licensee may be required to meet the full or increased economic substance requirements under Article 6.1 of the ESR Regulations if the other activity or asset brings the UAE business within the scope of a different Relevant Activity category (e.g. Lease-Finance), and the Licensee derives gross income from such other Relevant Activity.
Real estate assets owned by the Licensee that are solely used for purposes of its Holding Company Business will not prevent such Licensee from being considered as carrying on a Holding Company Business.
The following table provides examples of how a UAE business may assess its obligations under the ESR Regulations in the above circumstances.
| Sr. # | Asset / Activity | Income from Asset / Activity | In Scope of the ESR Regulation | Required to meet the ESR requirements |
| 1 | Holding immovable assets (e.g. real estate) | Income from the immovable assets (e.g. rent) | No | N/A |
| 2 | Holding movable assets | Income from movable assets, e.g.:finance lease incomeincome from the sale of movable assets) | Yes – Lease-Finance BusinessNo | YesNo |
| 3 | Holding Intellectual Property Assets | Income from intellectual property (refer to Section 2.8 for an example in respect of embedded intellectual property) | Yes -Intellectual Property Business (if the gross income from the Intellectual Property Asset is separately identifiable) | Yes (increased substance requirements apply to a High-Risk IP Licensee) |
| 4 | Holding equity interests only | Income from equity (e.g. only dividends and capital gains) | Yes -Holding Company Business | Reduced substance requirements |
| 5 | Holding equity interests and undertaking another activity that is not Relevant Activity | Income from equity interests and non-Relevant Activities | No | N/A |
| 6 | Holding equity interests and undertaking another Relevant Activity | Income from equity interests and the other Relevant Activity | Yes -Business of the Relevant Activity, but not a Holding Company Business | Yes (increased substance requirements apply to a High-Risk IP Licensee) |
Core Income-Generating Activities of a Holding Company Business
The ESR Regulations mention the following CIGAs for a Holding Company Business:
- Holding Company Business are all activities related to acquiring and holding shares or equitable interests in other companies, provided such activities do not constitute another “Relevant Activity”.
How BSA can help you
We can assess if the entities and activities are within the scope of the economic substance regulations and/or whether the entity can benefit from any of the exemptions in the Regulations.
We can carry out a gap analysis that represents the current substance and corporate governance processes against what is required under the regulations.
We can support you in the preparation and submission of your annual notifications and economic substance report to the Regulatory Authorities.
Connect with our team at +97145707357 or send us an email at info@bsauditing.com.
