Delegating Core Income-Generating Activities in Compliance with Economic Substance Regulations

The Economic Substance Regulations in the UAE require Licensees to conduct core income-generating activities (CIGAs) in the UAE, either by themselves or by another legal entity. CIGAs are essential operations that require a Licensee to actively engage in order to profit from the Relevant Activities carried out by the business. This article covers the importance of delegating Core Income-Generating Activities in compliance with the Economic Substance Regulations and also offers recommendations for ways to conduct them successfully.

Table of Contents

Understanding Core Income-Generating Activities (CIGAs)

The Economic Substance Regulations provide a list of CIGAs that are commonly associated with each Relevant Activity. However, it is crucial to remember that this list of activities is not comprehensive, and a Licensee must carry out any CIGAs in the UAE that create Relevant Income. Here are some examples of CIGAs for each Relevant Activity:

Banking Business: fundraising, risk management, loan and credit provision, capital management, and reporting.
Insurance Business: anticipating and estimating risk, insuring or re-insuring, underwriting insurance, and providing services.
Investment Fund Management Business: making decisions regarding the buying and selling of investments, determining reserves and risk, deciding on changes in interest rates or currency, and creating reports.
Lease-Finance Business: In the lease-finance business, terms of funding are agreed upon, assets to be leased are identified and acquired, financing or leasing durations are defined, agreements are monitored and revised, and risks are managed.
Headquarters Business: making pertinent management decisions, paying operational costs for a group, and organizing group projects.
Shipping Business: crew management, ship maintenance, tracking, ordering, delivery, and journey planning.
Holding Company Business: all activities related to that business.
Intellectual Property Business: development and research, advertising, marketing, and distribution. It also involves making strategic decisions, risk management, and ancillary trading.
Distribution and Service Center Business: transportation and storage of supplies, parts, or finished goods, inventory management, receiving orders, and other administrative and consulting activities.

Delegating Core Income-Generating Activities to Third Parties

Core Income-Generating Activities (CIGAs) are required to be carried out in the United Arab Emirates, but under specific circumstances, which include:

Board approval: Delegation cannot take place without the consent of the Licensee’s governing board of directors or an equivalent management body.
Written agreement: Second, the Licensee and the service provider must have a binding written agreement that specifies what services are to be delivered.
Licensee oversight: The licensee has to possess the know-how to efficiently oversee and manage the activity that is being outsourced.
Service provider in UAE: The fourth requirement is that the service provider be based in the United Arab Emirates.
No transfer of risk: The Licensee should not let the service provider have full authority and responsibility for the CIGAs when they delegate tasks to them.
Licensee responsibility: The Licensee continues to be entirely in charge of overseeing the CIGA and the Licensee’s interaction with the service provider.

Though the actual procedures may take place outside of the UAE, the ESR will treat the CIGA as though it had been carried out in the UAE by the service provider if certain requirements are satisfied.

Guidelines for Delegating Core Income-Generating Activities

The following are some guidelines that a Licensee should keep in mind while delegating CIGAs in accordance with the ESR:

Identify the CIGAs: The relevant activity requires the Licensee to determine the Core Income-Generating Activities (CIGAs). Their task is to find out which CIGAs may be handed off to others without risking ESR compliance.
Choose the right entity: The Licensee needs to pick a company that can successfully carry out the assigned CIGAs while adhering to the ESR. In order to carry out the tasks, the entity in question must possess sufficient knowledge, tools, and systems.
Establish clear communication channels: To ensure effective delegation of CIGAs, the Licensee must set up transparent lines of communication with the company responsible for carrying them out. This will make sure that the other party’s actions can be effectively monitored and controlled.
Monitor and control: The Licensee is responsible for keeping an eye on the other party’s actions to make sure they’re following the ESR. This involves looking into the documents, rules, and procedures of the entity that pertain to the CIGAs that have been delegated.
Maintain adequate assets and personnel: In order to carry out the delegated CIGAs successfully, the organization responsible must ensure that it has sufficient assets and staff. Having the right tools, space, and technologies to execute the CIGAs is an important part of this.
Comply with reporting requirements: The entity carrying out the delegated CIGAs must comply with the reporting requirements set out in the ESR. This includes submitting the necessary reports and documentation to the relevant authorities in a timely and accurate manner.

Even though a licensee can hire someone else to handle CIGAs, it’s ultimately up to the licensee to make sure the outsourcing provider satisfies all ESR regulations. Both the outsourcing provider and the licensee must be able to show that the outsourcing provider is adequately supervised and controlled while performing the CIGA in the UAE.

To conclude, licensees looking to comply with the Economic Substance Regulations (ESR) in the UAE may find that delegating Core Income-Generating Activities (CIGAs) is a suitable approach. It is essential, however, to follow the instructions given by the appropriate authorities when carrying out the delegation process. Licensees can make sense of the maze of regulations and be sure they’re meeting all the requirements by consulting with service providers that focus on ESR compliance. Licensees may maintain their market reputation and reduce the likelihood of penalties by being proactive with CIGA delegation and compliance.