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Adequacy Test: How to satisfy the requirement: Isle of Man has introduced the substance
requirement as part of its Income Tax Act. In the
A Licensee to employ adequate resources to event of non-compliance, penalties are high for the
conduct business activities commensurate with first year with a risk of being struck-off on a repeated
the size of the business with demonstration of non-compliance.
adequacy of physical assets, human resources
and operational spends to conduct the business in The regulations in Guernsey and Jersey are like
the UAE. What a licensee needs to do to meet the that of Isle of Man.
adequacy substance requirement:
Bahrain requires an entity to submit Annual
• Prepare a list of all physical assets Report within three months from the end of its
financial year. The first Annual Report was due on
• Prepare a list of all employees including on 30 June 2020 (including three months extension).
contract basis. It needs to evaluate whether it The Annual Report requires an entity to attach
has adequate number of full-time employees certain documentary evidence (non-financial) to
who are adequately qualified or experienced to demonstrate substance including:
perform their roles and responsibilities and are
resident in the UAE. • Agenda for the board meetings

• Has adequate operating expenses • Copies of board meeting minutes reflecting
commensurate to the size of business activities. strategic decisions

Licensees might be outsourcing all or few of its • Qualification details of the employees, activity
processes to related/third parties. In such cases, to wise
meet with the substance in the UAE, the Regulation
requires such related/third-party service provider The regulation also requires the licensee
to be located in the UAE. Moreover, a Licensee to ensure it has adequate and appropriate
should have full supervision and complete control internal policies & controls for its operation,
over such service provider. Non-core processes compliance, corporate governance, & risk
could still be outsourced outside of UAE and meet management. If an entity in Bahrain has
the substance requirement. not maintained adequate documentation or

If a Licensee is carries out more than one Relevant complied with the regulation, it must provide
Activity, it may be required to demonstrate substance justification.

for each of the Relevant Activity separately.
To conclude, we are entering into an era of
Evidence submission with Annual Report enhanced corporate compliances. Authorities in

A Licensee may be required to provide evidence of few jurisdiction view non-compliance strictly and
board meetings held in the UAE, adequacy of full- this could ultimately lead to suspension of the
time employees and their qualification, nature and license or closure of the business. Moreover the
type of expenses, details of outsourcing etc. The non-compliance could have a negative impact
Licensee should start review of the documents and on the other businesses operated by the Ultimate
processes and be ready with the Annual Report Beneficial Owner. It is never too late to begin.
submission.

Reference from other jurisdictions

Apart from UAE, there are 11 other jurisdiction that
have implemented ESR in 2019. The regulation are
stems from Action 5 of BEPS. Let us briefly examine
ESR in a few other jurisdictions:

British Virgin Island (BVI) has imposed
responsibility on the registered agents to ensure the
companies they manage are comply the regulation. CA Rajgopal Pai

Disclaimer:
This article and/or write ups and/or any of its content shall not be treated as opinion and/or advice in any circumstances of the author(s) and/ or the Chapter. Reader’s to apply their best
judgement in the best interest of their requirement and should seek a formal opinion on any issue.
32 TAX JOURNAL 2020 The Institute of Chartered Accountants of India (Dubai) Chapter NPIO