Page 63 - Focus Group

INSIGHTS ON THE

ADEQUACY TEST: ESR

“Economic Substance Test” (ESR) under the 1. The adequacy check for employees can
ESR Regulations would involve proving that the be multifold. It may include aspects like
underlying economic benefit of any particular qualification, count, expertise, physical location
transaction was accrued within UAE. of employees, etc.

The adequacy test revolves around the “adequacy 2. Major challenges that would be faced in
of resources”. Resources may involve land, labor respect of employees may be the division of
and capital. time between multiple activities or entities.
An employee may be working for a group of
The underlying thought behind this adequacy
test is simple, if a company is conducting relevant companies or handling multiple positions in
a company. The businesses may now have
activities in UAE it shall have the necessary resources an additional responsibility to maintain and
to run those operations.
produce sufficient records to enable the
What is ADEQUACY? determination of the details of work carried out
by the employees for specific activities.
• There is no standard definition of adequacy
(neither in the ESR nor in any of the local 3. This can involve procurement of additional
regulations. There are no international systems or applications to record the activities
standards relating to these.) of employees, maintain the time sheets etc.

• The term adequacy is very subjective. 4. The employees shall be (in principle) resident
in UAE. In case the employee is a non-resident,
• The onus to justify the adequacy of any the person shall be counted only if the cost of
resources will be on the company. the employee is borne by the licensee AND also

The adequacy may change year on year basis the relevant activities are performed while the
depending on the growth of an entity. employee is physically present in the UAE.

We break down the adequacy of each of the Capital: This involves both, the fixed and
resources: Land, Labor and Capital. working capital
Land: This may involve proving the adequacy of 1. The adequacy of capital can be determined by
the premises of business operations. the amount and type of operating expenditure.

1. The entity may have to justify that the premises 2. The challenge is to identify expenses related to
through which the company operates is the relevant activity from the other expenses.
sufficient for its operations. This may be particularly for companies with
multiple line of businesses.
2. A practical difficulty in an economy like the UAE
will be the use of flexi desks. Though this is yet to
be practically addressed, there are registration
authorities that considers and approves use of
flexi desk as “premises” for operations of the
legal entity.
3. The requirement of office space may differ
based on whether it’s a trading or a service
industry, whether the operations are in house CA Dheeraj Ranasaria
or outsourced.
Disclaimer:
This article and/or write ups and/or any of its content shall not be treated as opinion and/
Labor: This may involve adequacy of the or advice in any circumstances of the author(s) and/ or the Chapter. Reader’s to apply their
employees working for business operations. best judgement in the best interest of their requirement and should seek a formal opinion
on any issue.

The Institute of Chartered Accountants of India (Dubai) Chapter NPIO TAX JOURNAL 2020 63