Economic Substance Regulations

Economic Substance Regulations (ESR) in the UAE are guidelines established to ensure that companies operating within the UAE engage in substantial economic activities and demonstrate real economic presence. These regulations require relevant businesses to maintain adequate economic substance in the UAE relative to the activities they undertake. The key objectives are to align with global standards set by the OECD and the EU to prevent harmful tax practices and ensure transparency. Companies must meet specific criteria, including core income-generating activities, adequate management and control in the UAE, sufficient full-time employees, incurred operational expenses, and adequate physical assets. Non-compliance with ESR can result in penalties and administrative actions.

Economic Substance Regulations

Guidance on applying the Regulations was issued on 11 September 2019 (Ministerial Decision No. 215 of 2019), and Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies lists the Regulatory Authorities tasked with administering and enforcing the Regulations. Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020 and an updated Guidance was issued on 19 August 2020. The rules mandate that UAE companies in onshore and free zones, along with other business entities performing specified “Relevant Activities,” must show a sufficient level of “economic presence” in the country about their activities to pass the “Economic Substance Test.”

The Regulations apply to financial years starting on or after January 1, 2019. Entities covered by the Regulations must submit an annual Notification form to their Regulatory Authority and an Economic Substance Report within 12 months of the end of their financial year (e.g., by December 31, 2020, for a financial year ending December 31, 2019). Entities do not need to meet the Economic Substance Test or file an Economic Substance Report for any financial period in which they have not earned income from a Relevant Activity or if they qualify for an exemption. However, a Notification form must still be submitted. Failure to comply with the Regulations can result in penalties, information exchange with foreign authorities, and other administrative sanctions, such as the suspension, revocation, or non-renewal of the entity’s trade license or permit.

Purpose of the Notification

The purpose of the notification is to give regulatory authorities initial information about licensees and their activities in the UAE during the relevant reportable period. This information is a prerequisite for filing an Economic Substance Report for the same period if required.

Who Needs to Submit a Notification?

A Notification must be filed if you are a corporate entity (such as a Limited Liability Company, Public Joint Stock Company, Private Joint Stock Company, etc.) or a partnership (such as a Limited Liability Partnership, General Partnership, etc.) that conducts any of the following Relevant Activities in the UAE during the relevant Financial Year.

Relevant Activities

Banking Business
Insurance Business
Investment Fund Management Business
Lease – Finance Business
Headquarters Business
Shipping Business
Holding Company Business
Intellectual property Business (“IP”)
Distribution and Service Center Business

Deadline for Filing a Notification

The notification must be filed within six months of the Licensee’s financial year-end. Notification is mandatory for the companies; non-compliance with the obligation to file a Notification before the deadline is subject to a penalty of AED 20,000.

Financial Year End	Notification Deadline (6 months)	Reporting Deadline (12months)
31-Mar	30-Sept	31-Mar
30-Jun	31-Dec	30-jun
30-Sep	31-Mar	30-Sep
31-Dec	30-Jun	31-Dec

Penalty of Incorrect Notification Information

Providing incorrect or false information in the Notification is subject to a penalty of AED 50,000. If a Licensee knowingly provides incorrect or false information or falsely claims an exemption from the Economic Substance Regulations, they may be considered to have failed the Economic Substance Test for the relevant Reportable Period.

Exemptions

If a Licensee claims to be an “Exempted Licensee,” it must specify the grounds for exemption under Question 1A-1E and furnish the required documentation to prove its exempt status.

An Exempted Licensee is not required to submit an Economic Substance Report or demonstrate Economic Substance in the UAE for Reportable Periods during which it meets the criteria for exemption.

1.A. The license is wholly owned by UAE nationals or UAE resident individuals who reside in the UAE, is not part of a multinational group, and only operates in the UAE.

1.B. Licensee is an Investment Fund as defined in the Regulations.

1.C. A licensee is a particular purpose vehicle or investment holding company of an Investment Fund as defined in the Regulations.

1.D. The licensee is resident for tax purposes in a jurisdiction other than the UAE.

1.E. Licensee is a UAE branch of a foreign company, and all income of the UAE branch is subject to tax in the jurisdiction of the foreign company