The Economic Substance Regulations (ESR) requires the offshore, mainland and free zone companies in the UAE that conduct one or more relevant activities to meet the Economic Substance Test in relation to that activity. In line with this, a Licensee that conducts the Insurance Business in the UAE needs to meet the Economic Substance Test by demonstrating that it conducts ‘core income-generating activities’ within the UAE; directs and manages the business from within the UAE; employs adequate full-time staff in the UAE or outsources to a UAE-based provider; incurs adequate operating expenditure in the UAE, and retains adequate physical assets in the UAE.
Conducting the Core Income Generating Activities (CIGA) is one of the key requirements to meet the Economic Substance Test in the UAE. As per the ESR, the CIGA can be defined as the activity of central importance to the company in generating the gross income from the Relevant Activity. The ESR law specifies that the Licensee doesn’t need to perform all of the CIGAs mentioned in the list. The Licensee needs to consider the activities from which it has generated a gross income and also ensure that those CIGAs were performed in the UAE.
Insurance Business as per Economic Substance Regulations (ESR)
The UAE ESR law defines the insurance business as the businesses that accept risks by effecting or carrying out contracts of insurance in both the life and non-life sectors. The definition includes the contracts of reinsurance and captive insurance arrangements. The Licensees that provide the captive insurance services are not considered as conducting Distribution and Service Centre Business to avoid duplication in ESR reporting.
Insurance brokers, agents, and other UAE businesses providing insurance-related services that do not involve assuming all or some of the insured risk are not considered as engaged in the Insurance Business. However, they may be considered as conducting any other Recent Activity as per the UAE ESR.
Core Income Generating Activities of Insurance Business
The ESR law mentions the following activities as the CIGAs of the insurance Business:
a) Predicting & Calculating Risk
An insurance company that carries out this CIGA determines and quantifies the possibility of the occurrence of the insured event and the likely costs associated with it. Further, the CIGA involves the process of ensuring that the insurance premiums charged are commensurate with the risks accepted.
b) Insuring or Re-insuring Against Risk & Providing Insurance Business to Clients
This CIGA involves activities such as insurance policyholders against specific risks and giving reinsurance to primary insurers.
c) Underwriting Insurance & Reinsurance
This CIGA of underwriting Insurance & Reinsurance is defined as the activity of evaluation and analysis of the risks of an insurance policy and establishing the pricing for accepted insurable risks.
Examples to Help Entities Assess If They Conduct the Insurance Business CIGAs
Scenario 1
Precious Life LLC is a UAE company that provides life, health, car insurance in and from the UAE. Furthermore, the entity is being regulated by the UAE Insurance Authority. As per the UAE ESR Law, Precious Life LLC is considered as carrying out the Insurance business and is required to meet the Economic Substance Test in the UAE.
Scenario 2
ABC LLC an insurance intermediary in the UAE and represents consumers in the placement and purchase of insurance. It also provides services to insurance companies to facilitate and complement the insurance placement process. However, ABC LLC is being regulated as an insurance broker and not as an Insurer. In this case, ABC LLC doesn’t fall within the scope of the Insurance Business Activity and is not required to meet the UAE Economic Substance Test.
Why Choose Jitendra Chartered Accountants?
The Economic Substance Regulations (ESR) has been introduced in the UAE to curb financial malpractices such as tax evasion by companies. In line with the ESRF law, the companies in the UAE need to demonstrate economic substance in the UAE in relation to the relevant activity they carry out in the UAE. As part of this, the offshore, mainland and free zone companies are required to meet the Economic Substance test and file an annual ESR Return to the relevant free zone, offshore or mainland regulatory authority.
The failure to meet the Economic Substance Test in UAE leads to hefty penalties and further consequences such as sharing of information with the competent authority. To avoid such fines and to ensure ESR compliance, the companies need to avail the professional assistance of reputed ESR Consultants like Jitendra Chartered Accountants (JCA). JCA’s highly qualified auditors and business setup consultants assist the companies in,
- Determining whether the companies can meet the Economic Substance Test in the UAE
- Assisting the companies to formulate remedial measures in case of failing to meet the test
- Guiding the companies in filing and submitting annual ESR Return