The Economic Substance Regulations (ESR) were issued by the UAE Cabinet of Ministers in 2020 to ensure that entities carrying out geographically mobile activities have demonstrable economic substance in the UAE. Entities conducting specific “Relevant Activities” are subject to the ESR if they generate “Relevant Income.” One of the nine Relevant Activities defined in the ESR is the Holding Company Business.
This article will examine how the Economic Substance Test applies specifically to Holding Company Businesses that have minimal additional activity beyond solely holding equity participations in other entities.
Holding Company Business as a Relevant Activity
Under the ESR, a Holding Company Business refers to holding equity participations in other entities and providing financing, solely from its own funds, to other entities. Some key points about Holding Company Businesses:
- Holding equity participations includes where the holding company solely holds assets such as shares, stock, debentures, or similar equity interests.
- Providing financing refers to financing provided from the holding company’s own funds to subsidiaries or other group entities solely through loans, cash advances or other financial transactions.
- A holding company is considered to be carrying on a Holding Company Business under the ESR if it derives Relevant Income from its equity holdings or financing activities.
Minimal Activity Requirements for Holding Companies
Recognizing that pure holding companies have limited activities, ESR sets out reduced substance requirements for holding companies that solely hold equity participations and do not undertake any additional activities beyond this:
- The holding company must be directed and managed in an adequate manner in the UAE. This includes having adequate number of board meetings demonstrating active review and making of key decisions impacting the Holding Company Business.
- The holding company must have adequate employees, expenditure and physical assets in the UAE to carry out the required direction and management of the Holding Company Business.
- The holding company must maintain adequate books and records in the UAE to substantiate compliance with the ESR.
No other core income generating activities (CIGAs) need to be demonstrated by such holding companies beyond the minimum direction and management requirements above.
Demonstrating Direction and Management
Some factors that can help demonstrate the “directed and managed” requirement in the UAE include:
Board meetings
- Holding an adequate number of board meetings in the UAE each year based on scale of activities
- Ensuring minutes record all strategic decisions taken
- Meeting quorum and attendance requirements
Senior Management
- Appointing qualified UAE-based directors and senior managers
- Evidence that strategic decisions are taken by such persons in the UAE
Record Keeping
- Maintaining key corporate records such as shareholder registers, financial statements, board meeting minutes in the UAE
- Books and records adequately substantiate compliance with ESR
Financial oversight
- Oversight of funding, distributions and treasury functions from the UAE
- Approval of annual budgets and financial plans
By adequately addressing the above factors, a holding company can demonstrate meeting the Economic Substance Test requirements under the minimal activity provisions for holding companies in Article 6(5) of the ESR.
Table 1 – Comparison of Substance Requirements
| Holding Co. with Additional Activities | Holding Co. with Minimal Activity |
|---|---|
| Must identify and demonstrate ALL core income generating activities (CIGAs) relevant to additional activities undertaken. | Only need to meet minimum “directed and managed” requirements – no other CIGAs required. |
| Higher substance standards in terms of adequate number of qualified employees, operating expenditure, physical assets based on scale of additional activities. | Lower standards apply just to meet minimum direction and management requirements. |
| Substance must be proportionate to ALL activities undertaken and income generated. | Substance only needs to relate to equity holdings and financing activities, if applicable. |
FAQs
Q: Can a holding company outsource its minimal activities?
A: Yes, a holding company can outsource the minimum “directed and managed” activities required under Article 6(5) of the ESR, provided the outsourcing requirements under the ESR are met, including the outsourced activities being conducted in the UAE and the holding company retaining ability to supervise activities.
Q: How are equity holdings and financing income determined?
A: Equity holdings income includes dividends, capital gains etc. Financing income includes interest on loans. Relevant Income is total gross income without deducting any costs and must be evidenced from the entity’s books and records.
Q: Can a holding company avail economic substance exemptions?
A: Yes, if the holding company qualifies as an investment fund, is a tax resident outside UAE, or meets other exemption conditions, it may not need to meet economic substance requirements.
Conclusion
Consult Economic Substance Regulation experts The ESR accommodate holding companies with minimal additional activity through differential treatment that recognizes their limited functions. By adequately demonstrating direction and management from the UAE along with proper record keeping, such holding companies can meet the Economic Substance Test requirements. It is therefore important for holding companies to understand and comply with the tailored provisions under Article 6(5) of the ESR.
economic Substance Regulations
