Economic Substance Regulation – simplified for you
In April 2019, the UAE issued Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance
(“Resolution 31″) as part of its commitment as a member of the OECD Inclusive Framework, and in response
to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business
On 10 August 2020, the Cabinet of Ministers issued Resolution No.57 of 2020 Concerning Economic
Substance Regulations (“Resolution 57“). Resolution 57 amends and repeals Resolution 31, Cabinet of
Ministers Resolution No. 58 of 2019, and Cabinet of Ministers Resolution No. 7 of 2020. Following the
issuance of Resolution 57, H.E. the Minister of Finance issued new Guidance by way of Ministerial Decision
No. 100 of 2020, which also includes an updated Relevant Activities Guide appended as Schedule 1
(“Ministerial Decision 100“).
The Regulations require UAE onshore and free zone companies and certain other business forms that carry
out certain activities (Licensees – See Question 5) to maintain and demonstrate an adequate “economic
presence” in the UAE relative to the activities they undertake. The purpose of the Regulations is to ensure
that UAE entities report actual profits that are commensurate with the economic activity undertaken within
Resolution 57 and Ministerial Decision 100 (collectively, the “Regulations”) have been prepared in
consultation with the Organisation for Economic Cooperation & Development (‘OECD’) and the European
Please see the below FAQ’s for better understanding of ESR
Who is subject to the Regulations?
The Regulations apply to Licensees that carry out any of the following Relevant Activities.
✓ Banking Businesses
✓ Insurance Businesses
✓ Investment Fund Management Businesses
✓ Lease-Finance Businesses
✓ Headquarter Businesses
✓ Shipping Businesses
✓ Holding Company Businesses
✓ Intellectual Property Businesses
✓ Distribution and Service center Businesses
The commercial license may indeed state the Relevant Activity, a “substance over form” approach must be
used to determine whether a Licensee undertakes a Relevant Activity and is within the scope of the
Regulations. This means looking beyond what is stated on the commercial license to the “Activities actually
undertaken by the Licensee during a financial period.”
What is a Licensee?
A Licensee is a juridical person or an unincorporated partnership that is registered in the UAE and that undertakes
a Relevant Activity.
By way of example, a Licensee can be:
• A limited liability company
• A private shareholding company
• A public shareholding company
• A joint venture company
• A partnership (e.g., a limited liability partnership, a limited partnership, a general partnership, etc.)
The following persons are “Not considered Licensees” under the Regulations:
• A natural person
• A sole proprietorship
• A Trust
• A Foundation
Is a company registered under an ‘offshore’ free zone company regime subject to the Regulations?
Yes, if the ‘offshore’ company undertakes a Relevant Activity.
When should a Licensee assess whether it undertakes a Relevant Activity?
This assessment needs to be done for each financial period starting on or after 1 January 2019, and should take into account the activities undertaken by the Licensee at any time throughout the relevant financial period.
Who is exempt from the Regulations?
The following Exempted Licensees are exempt from filing an Economic Substance Report and the requirement to
demonstrate substance in the UAE:
• A Licensee that is tax resident outside the UAE;
• An Investment fund and its underlying SPVs / investment holding entities;
• A wholly UAE resident-owned business that is not part of a multinational group and that only carries on
business in the UAE;
• A branch of a foreign entity that is subject to tax on all of its Relevant Income in a foreign jurisdiction.
Sufficient evidence must be submitted along with the Notification form to claim any of the above exemptions.
Please refer to Ministerial Decision 100 for more information
What if a Licensee does not undertake a Relevant Activity during a financial period?
If a Licensee does not undertake a Relevant Activity during a financial period, it does not need to meet the
Economic Substance Test.
The Licensee would not be required to submit a Notification or submit an Economic Substance Report for the
relevant financial period.
What if a Licensee undertakes a Relevant Activity, but does not earn any income from that activity during a
A Licensee that undertakes a Relevant Activity but that does not earn income from this activity in a financial
period, is not required to meet the Economic Substance Test or file an Economic Substance Report for that period.
However, the Licensee would still need to submit a Notification on the Ministry of Finance filing portal
What is a “Distribution and Service Centre” Business?
A “Distribution and Service Centre” Business refers to two distinct activities that are covered under one “Relevant
A UAE entity is considered engaged in a Distribution Business if it:
• Purchases goods from a Foreign Connected Person; and
• Distributes those goods
A UAE entity is considered engaged in a Service Centre Business if it:
• Provides services to a Foreign Connected Person
The economic substance requirements for a Distribution and Service Centre Business are applicable to UAE entities
whose main activity is distribution and/or service center operations. Licensees that are mainly engaged in Banking,
Insurance, Investment Fund Management, Lease-Finance, Shipping, Intellectual Property or Headquarter Business
may also purchase goods for, and/or provide services to foreign group companies as a normal part of their business
operations. To prevent duplicate reporting, such Licensees are not also considered engaged in a Distribution and
Service Centre Business.
UAE entities that only purchase goods from third parties, or that only provide services to third parties, are not
subject to the Regulations (as a Distribution and Service Centre Business).
Does a business that purchases goods from a foreign group company and sells such goods (in or outside the UAE)
fall within the scope of a Distribution and Service Centre Business, if the goods are directly dispatched to the
customer by the foreign group company?
Yes, the amended definition of a Distribution and Service Centre Business would apply in such cases, as the goods
are no longer required to be imported into the UAE, meaning “bill-to-ship” transactions may fall within the scope of
the Regulations as a Distribution and Service Centre Business.
Further, the removal of the requirement for the goods to be resold outside the UAE, means that the local
distribution of goods (purchased from a foreign group company) would also be within the scope of the Regulations
as a Distribution and Service Centre Business.
What is a Lease-Finance Business?
A UAE entity is considered engaged in a Lease-Finance Business if it offers credit or financing for any kind of
Providing credit includes making loans and entering into other financing arrangements such as hire purchase
agreements and finance leases.
Licensees engaged in Banking, Insurance, Headquarters and Investment Fund Management Business may also
perform lease or financing activities as a normal part of their business operations. To prevent duplicate reporting,
such Licensees are not also considered engaged in a Lease-Finance Business and will not need to separately
demonstrate economic substance in respect of any ancillary Lease-Finance activities.
Is lending to another group entity considered a “Lease-Finance Business”?
Yes, a UAE entity that makes a loan or provides any other form of credit to a UAE or foreign group company for
consideration (e.g. interest) will be considered engaged in a Lease-Finance Business.
Is investing and trading in debt securities considered undertaking a Lease-Finance Business?
No, UAE entities that invest and hold bonds and other debt securities that are traded on a regulated exchange are
not considered engaged in a Lease-Finance Business.
What does consideration for the purposes of a Lease-Finance Business include?
Consideration includes interest, origination and processing fees, gains upon conversion of a loan into the share
capital of the debtor, and late payments penalties. The grant of security in favour of the lender would not constitute
What is a Headquarter Business?
A UAE entity that provides services to other foreign group entities, and through the provision of such services:
• has taken on the responsibility for the overall success of the group; or
• is responsible for an important aspect of the group’s performance.
Does an entity need to be the ‘parent’ company to be considered a Headquarter Business?
No, a group’s corporate structure is not relevant in determining whether a UAE entity within the group is engaged in
a Headquarter Business. Whether an entity is engaged in a Headquarter Business is entirely dependent on the
nature of the services provided to foreign group companies.
Can an entity be considered engaged in a Headquarter Business in addition to carrying on another Relevant
Possibly, if the Relevant Activities form two or more distinct business activities. However, if an activity that might
otherwise fall within the definition of a Headquarters Business forms part of another main Relevant Activity of the
Licensee, the Licensee would not be considered to also be engaged in a Headquarter Business. For example, a UAE
entity that undertakes captive insurance activities will not be considered to carry on a “Headquarter Business”
simply because it assumes material risk on behalf of the group.
Who needs to submit a Notification and by when?
Licensees and Exempted Licensees that undertake a Relevant Activity (irrespective of whether the Licensee or
exempt Licensee has earned income from the Relevant Activity during the financial period) are required to file a
Notification within six months from the end of the relevant financial period. All Notifications must be submitted on
the Ministry of Finance filing portal.
Will a business that has already submitted (30th June 2020 ) a Notification to a Regulatory Authority be required
to resubmit on the MoF Portal, and if so, by when?
Yes, the deadline for resubmission is 31 January 2021 at the latest.
What are the penalties for non-compliance?
• Failure to submit a Notification: AED 20k
• Failure to submit an Economic Substance Report:
✓ Penalty of AED 50k; and
✓ Deemed failure to demonstrate economic substance in the UAE
• Failure to provide accurate or complete information:
✓ Penalty of 50k; and
✓ Deemed failure to demonstrate economic substance in the UAE
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What should a Licensee consider before the end of a financial period?
The following is meant as a non-exhaustive list of matters a Licensee should consider (and action, where relevant)
before the end of a financial period:
• Assess what (if any) Relevant Activities it has performed during the financial period (applying a “substance over
• Assess the amount and type of income earned (if any) from the Relevant Activity during the financial period;
• Hold board meetings with a quorum of directors physically present in the UAE;
• Ensure board meeting minutes are signed and maintained in the UAE;
• Identify the amount and type of expenses and UAE based assets (incl. premises) in respect of the Relevant
Activity, and ensure access to assets (incl. premises) can be demonstrated (through agreements and financial
• Identify the number of UAE based full-time employees or other personnel (and their qualifications) responsible
for carrying on the Licensee’s Relevant Activity; and
• Ensure control and supervision over any outsourcing arrangements can be demonstrated, e.g. through
Additional actions may be required to ensure a Licensee can demonstrate sufficient economic substance in the UAE
for a relevant financial period, and the considerations above may differ where a Licensee has either a Holding
Company or a High Risk IP Business.
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