Alsuwaidi & Company

Foreign Ownership

Economic Substance Regulation of UAE


H.H. Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai has promulgated the Resolution of the Cabinet of Ministers No. (31) for 2019 concerning Economic Substance Regulations (ESR/Regulations) on 30 April 2019.

Pursuant to the Regulations, a Ministerial Decision no. 215 of 2019 on the Issuance of Directives for the Implementation on the Provisions of Cabinet Decision no. 31 of 2019 Concerning Economic Substance Requirements was issued on 11 September 2019 as a guidance ( Guidance) on how the Economic Substance can be applied and how the Economic Substance Test may be met for the purpose of complying with the ESR .

The Economic Substance Regulations shall apply to UAE onshore, Free Zone and offshore companies that operate and generate income from the “Relevant Activities”.


Background of the ESR:

On 1 December 1997, the European Union (EU) adopted a resolution on a code of conduct for business taxation with the objective to curb harmful tax competition. Shortly thereafter, the Code of Conduct Group on Business Taxation (COCG) was set up to assess tax measures and regimes that may fall within the scope of the Code of Conduct on Business Taxation.

On 5 December 2017, the COCG published the (first) EU list of non-cooperative jurisdictions for tax purposes, in cooperation with the Economic and Financial Affairs Council (ECOFIN).

Recently, the world economy has been characterized by a shift from country-specific businesses to global enterprises operating both over the internet and at locations remote from where their physical customers are buying goods and services on online. This has presented opportunities for complex profit repatriation structures – reducing the tax burden in other words – and has fuelled concerns of unfair and unethical practice.

As such, EU formalize and applies three listing criteria, which are aligned with international standards and reflect the good governance standards that the Member States comply with themselves:

Transparency: Jurisdictions should comply with the international standards on exchange of information, automatic and on request. In addition, jurisdictions should sign the OECD’s (The Organization for Economic Cooperation and Development) multilateral convention or signed bilateral agreements with all EU Member States to facilitate such exchange.

Fair Tax Competition: Jurisdictions should not have harmful tax regimes nor facilitate offshore structures which attract profits without real economic activity.

BEPS Implementation: Jurisdictions should commit to implementing the OECD’s Base Erosion and Profit Shifting (BEPS) minimum standards, starting with Country-by-Country Reporting

The common denominator for the Economic Substance systems is The Organization for Economic Cooperation and Development (OECD) Forum on Harmful Tax Practices (FHTP), which sets the global standard that requires companies to have substantial activities in a jurisdiction (known as “Economic Substance”).

OECD is a unique forum where the governments of 36 member states with market economies work with each other, as well as with more than 70 non-member economies to promote economic growth, prosperity, and sustainable development. Over 125 jurisdictions around the world are members of the OECD BEPS Inclusive Framework. The FHTP is a sub-body of the Inclusive Framework and is responsible for assessing and monitoring the substantial activities standard for all member jurisdictions.

BEPS refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately. Working together within OECD/G20 Inclusive Framework on BEPS, over 130 countries and jurisdictions are collaborating on the implementation of 15 measures ( as mentioned below) to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment as well as to ensure that the profits are taxed where the actual economic activities are conducted and also on value creation.

Action 1 Tax challenges arising in digitization

Action 2 Neutralizing the effect of hybrid mismatch arrangements

Action 3 Controlled Foreign Company

Action 4 Limitation on Interest deductions

Action 5 Harmful tax practices

Action 6 Prevention of Tax treaty abuse

Action 7 Permanent establishment status

Action 8-10 Transfer Pricing

Action 11 BEPS data analysis

Action 12 Mandatory disclosure Rules

Action 13 Country-by-Country reporting

Action 14 Mutual Agreement procedure

Action 15 Multilateral Instrument

The Members of the OECD/G20 Inclusive Framework on BEPS has to comply with 4 minimum standards out of the above 15 measures which are namely Action 5, Action 6, Action 13 & Action 14. As per OECD, each minimum standard of BEPS is subject to Peer Review to ensure proper flow of information and accurate implementation.


In May 2018, UAE joined the OECD Inclusive Framework on BEPS and committed to introduce the minimum standards by the end of 2018.

The rules of Economic Substance Regulations of UAE ( Cabinet of Ministers Resolution No. 31 of 2019) are broadly similar to the regulations introduced by other countries with similar tax environment (i.e. no or only nominal tax), as they follow the guidance issued and the global standard developed by the European Union (EU) and OECD.


The main purpose of the ESR is to comply and bring specific requirements for the entities incorporated in the UAE to demonstrate that the companies are carrying out the actual economic activity in the State that achieve economic substance interest and the basis to support that the incorporation in the UAE was not driven solely to benefit from the privileged tax regime.

The introduction of the ESR in the UAE brings the UAE in line with other jurisdictions that have recently issued economic substance legislation (e.g. BVI, Mauritius, Cayman Islands, Bermuda Bahamas, Guernsey, the Isle of Man and Jersey), and affirms the UAE’s commitment to addressing concerns around the shifting of profits derived from certain geographical mobile business activities to “no or nominal tax jurisdictions”(called as “NOON’s”) without corresponding local economic activities. Such type of companies uses NOON’s to park profits thereby harming the tax base of another jurisdiction.

The introduction of the ESR in UAE is one of the milestones for the UAE’s tax policy and it is an important step towards its affiliation with the global Organization for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) directives. Aside from this, the implementation of the Regulation should further strengthen and benefit the UAE in helping and assisting to address various reputational concerns such as in respect of transparency, which the jurisdiction has been subject to from international players and investors alike.


Article 1 outlines the basic definition for the implementation of this resolution. The Resolution of the Cabinet of Ministers defined the licensee as a natural, or juridical person licensed by the competent licensing authority / authorities in the State, to carry out a relevant activity in the State. This includes free zones and financial free zones. Article 2 determines the requirements and sets out the criteria that ascertain that the licensee is carrying out an activity that achieves economic interest of the State.

Article 3 established the scope of application of the resolution. Articles 4 and 5 from the Cabinet of Ministers Resolution define the relevant activity and regulatory authority and the “State’s core income-generating activities”. Article 6 of the resolution clarify the requirement to meet economic substance test. Article 7, meanwhile, identifies the assessment of whether economic substance test is fulfilled by the licensee. Article 8 mentions the requirement to provide information. Article 9 of the Cabinet of Ministers Resolution identifies the process of exchanging information submitted by a licensee, which the regulatory body shall provide the competent authority pursuant to this resolution. Articles 10 and 11 of the resolution details the offences and penalties where the Economic Substance Test is not met, or for failure to provide information, or, for providing inaccurate information. Articles 12, 13, and 14 of the resolution identify the period for imposition of penalties, right to appeal against administrative penalties, and date of payment of administrative penalties. Meanwhile, Article 15 of the Cabinet of Ministers Resolution defines the power to enter business premises and examine business documents.

Article 16 of the Cabinet of Ministers Resolution points out that any provision contrary to, or conflicting with the provisions of this resolution, shall be repealed. Articles 17 and 18 of the resolution stresses that the Cabinet of Ministers, or a delegated authority, may issue one or more decisions to implement any provision of this resolution, which shall come into force on the date of its issuance.


The provisions of this Resolution shall apply to a Licensee/Company that carries out any Relevant Activity in the UAE. The provisions of this Resolution shall not apply to any commercial companies (as defined in Article 1 of the Commercial Companies Law) which is the Government of the State, or the Government of any Emirate of the State, or any governmental authority or body of any of them has any direct or indirect ownership in its share capital.


The Regulations apply from the date of issuance of Resolutions i.e. on 30 April 2019


The Regulations shall apply to all UAE onshore, free zone and offshore entities that carry on a “Relevant Activity” to be within the scope of the Regulations. However, whether ESR shall applicable to the sole proprietorship or branch office shall yet to be clarified.


The following are considered as “Relevant Activities” under the Regulations:

Fund management
Holding company
Intellectual property (IP)
Distribution and service centre

The economic substance test is based on the three important key pillars that a Licensee/Company must satisfy the following criteria to meet the Economic Substance Test in relation to any Relevant Activity, as specified above, carried on by it.

Core Income Generating Activity (“CIGA”) related to the activities covered by the ESR should
be undertaken in the UAE;

Licensee/Company should be directed and managed from the UAE;
The Licensee’s activities must be carried out with adequate local “Economic Substance” with regard to the level of relevant activity in the UAE.
The Economic substance consists of:

Full-time employees

According to Article 5 of the Regulations, State Core Income-Generating Activities means activities that must be conducted by a Licensee in the State (UAE) and shall include:

Relevant activity CIGA AS PER UAE ESR
Banking business a. raising funds, managing risk including credit, currency and interest risk;

  1. taking hedging positions;
  2. providing loans, credit or other financial services to customers;
  3. managing capital and preparing reports or returns, or both, to investors or any government authority with functions relating to the supervision or regulation of such business

Insurance Business a. predicting and calculating risk.

  1.  insuring or re-insuring against risk and providing Insurance Business services to clients.
  2. Underwriting insurance and reinsurance

Investment Fund Management Business a. taking decisions on the holding and selling of investments.

  1. calculating risk and reserves.
  2. taking decisions on currency or interest fluctuations and hedging positions.
  3. preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business.

Lease -Finance Business a. agreeing funding terms.

  1. identifying and acquiring assets to be leased (in the case of leasing).
  2. setting the terms and duration of any financing or leasing.
  3. monitoring and revising any agreements.
  4. managing any risks.

Headquarters Business:

  1.  taking relevant management decisions.
  2. incurring operating expenditures
  3.  incurring operating expenditures on behalf of group entities.
  4. coordinating group activities.

Shipping Business a. managing crew (including hiring, paying and overseeing crew members).

  1. overhauling and maintaining ships.
  2. overseeing and tracking shipping.
  3. determining what goods to order and when to deliver them, organising and overseeing voyages.

Holding Company Business a. all activities related to that business;

  1.  in respect of Holding Company Business that derives income from other sources other than dividends and capital gains from its equity interest,
  2. the state Core Income-Generating Activities shall be those activities associated with the income generated.
  3. Maintaining adequate employees and premises for holding and managing business.

Intellectual Property Business a. where the Intellectual Property Asset is

  1. patent or an asset that is similar to a patent, research and development.
  2. non-trade intangible (including a trademark), branding, marketing and distribution.
  3. if the Relevant Activity is conducted by a Licensee that is regarded as a High-Risk IP Licensee, the State Core Income-Generating Activity must include any of the following additional activities:
      1. taking strategic decisions and managing (as well as bearing) the principal risks related to development and subsequent exploitation of the intangible asset generating income.
      2. taking the strategic decisions and managing (as well as bearing) the principal risks relating to acquisition by third parties and subsequent exploitation and protection of the intangible asset.
      3. carrying on the ancillary trading activities through which the intangible assets are exploited leading to the generation of income from third parties.

Distribution and Service Centre Business

  1.  transporting and storing component parts, materials or goods ready for sale.
  2. managing inventories.
  3. taking orders.
  4. providing consulting or other administrative services.


The Competent Authority as per the ESR is the Ministry of Finance, UAE. The Foreign Competent Authority is the foreign authority designated under an international agreement, treaty, or similar arrangement entered into by the State to request and receive any information or documentation in respect of and relating to the implementation of any provision of this Resolution.

The Regulatory Authority under the Regulations is different from the Competent Authority. However, the ESR envisage that it is yet to be designated regulatory authority or authorities to regulate compliance with the Regulations for the entire UAE and a Cabinet Resolution appointing the Regulatory Authority(s) is awaited in this respect.

Article 1 of the Regulations defines a Licensee as “any natural or juridical person licensed by the competent licensing authority(ies) in the UAE, to carry out a Relevant Activity in the UAE including a Free Zone and a Financial Free Zone.”

Further, the Guidance clarifies that a Licensee is considered licensed by virtue of holding a License from the relevant licensing authorities and every Licensee that carries on a Relevant Activity and derives an income therefrom in the UAE, including a Free Zone or a Financial Free Zone must meet the Economic Substance Test.

In view of the above Article, it is clear that a Licensee that does not derive any income from a Relevant Activity carried out in the UAE is out of the scope of Economic Substance Test.

According to the Regulations, the entities that are directly or indirectly owned by the UAE Government (Federal and Local Government) are out of the scope of the Regulations.

The Regulations do not apply to any commercial companies as defined in Article 1 of the UAE Commercial Companies Law, in which the UAE Federal Government, the Government of any Emirate, or any governmental authority or body of any of them has any direct or indirect ownership in its share capital. Whereas, Article 3.2 of the Guidance states that the Companies in which the Federal Government or the Government of any Emirate of the UAE or any governmental authority or body of any of them which has at least 51% direct or indirect ownership in its shareholding are out of the scope of ESR.

A Licensee shall notify the Regulatory Authority annually of the following:

Whether or not it is carrying on a Relevant Activity.
If the Licensee is carrying on a Relevant Activity, whether or not all or any part of the Licensee’s gross income in relation to the Relevant Activity is subject to tax in a jurisdiction outside of the State; in all cases such Licensee shall provide the Regulatory Authority with all information and documentation required to be submitted by it pursuant to this Resolution or any further guidance or decision issued pursuant to this Resolution.
The date of the end of its Financial year
Under Article 8(2) of the Regulations, the foregoing annual filing shall be made at the time specified by the Regulatory Authority and in the manner approved by the Regulatory Authority.
As mentioned above, the Regulatory Authority is to be identified or designated yet. Nevertheless, Article 4.2 of the Guidance clarifies that such filing must be made with effect from 1 January 2020.

According to the Regulations, a Licensee has to prove that it’s activities in the UAE have adequate substance and carry out State Core Income-Generating Activities (CIGA) in the UAE. Article 5 of the Regulations identifies, for each Relevant Activity, certain activities that must be carried out in the UAE.

Article 4.3(a) of the Guidance states that the list set out in Article 5 of the Regulations “is not exhaustive” and that the list “includes the activities listed but is not limited to them.” The Guidance further explains that the general principle is that the activities listed in Article 5 of the Regulations “are regarded to be the most important activities that a Licensee carrying out a Relevant Activity is expected to be carrying on in the UAE.”

According to the Article 6(2)(b) of the Regulations, one of the main requirements of meeting the Economic Substance Test is that a Licensee must be directed and managed in the UAE in relation to its Relevant Activity. Further, Article 4.3(b) of the Guidance states that the directed and managed test aim to ensure that there are an adequate number of board meetings held and attended in the UAE.

Article 4.3(b) of the Guidance further explains that:

“A determination as to whether an adequate number of meetings are held and attended in the UAE will be dependent on the level of Relevant Activity being carried out by a Licensee. It is expected that it must be at least one (1) meeting held in a Financial Year in the UAE. Consideration must also be given to meeting requirements prescribed under the applicable law regulating the Licensee or as may be stipulated in the constitutional documents of the Licensee.”

Article 4.3(b) of the Guidance further states that:

Meetings shall be recorded in written minutes and signed by attendees and such minutes are kept in the UAE. Quorum for such meetings shall be met and those attendees are physically present in the UAE. Directors shall have the necessary knowledge and expertise to discharge their duties and the minutes of board meetings must refer to all the relevant decisions taken and must be signed by directors physically present.

The Regulations or the Guidance does not either define the term “adequate” and “appropriate” but use the term in several places. For example, “adequate number of qualified full-time employees”, “adequate level of expenditure, premises are adequate for carrying out the Relevant Activity, adequate physical assets in the State etc’.

The intention of the Regulation for using the word “adequate” shall be “as much or as good as necessary for the relevant requirement or purpose”; and for the word “appropriate”, “suitable or fitting for a particular purpose, person, occasion”.

However, Article 4.3(g) of the Guidance states that businesses vary in size and therefore the employees, expenditures and premises which are adequate or appropriate for a large or medium sized business may not be adequate or appropriate for a small business and that the Regulations are not intended to impose requirements to engage employees or incur expenditures beyond what is actually required by a business.

Further, the Guidance states that what is adequate or appropriate for each Licensee will be based on the nature and level of Relevant Activity being carried out by such Licensee/Company. However, Licensee should ensure that it maintains enough records to demonstrate the adequacy and appropriateness of the resources utilized and the expenditures incurred.

Article 4.3(g) also further explains that the requirement for adequate employees is aimed at ensuring that employees carrying out a Relevant Activity are suitably qualified to carry out such activity. The requirement for adequate premises is entitled to ensure that a Licensee has procured appropriate premises to carry out a Relevant Activity in UAE.

The Regulation does contemplate that entities may appoint a third party to fulfill some or all their economic substance requirements, but in doing so the entity must be able to show and ensure that it has full control over the activity designated to the third party.

A Licensee has to satisfy that (1) there is an adequate number of qualified full-time employees present in the State (2) adequate operating expenditure incurred in the State and (3) there are adequate physical assets in the State in relation to a Relevant Activity if part of the CIGA for that Relevant Activity is undertaken by a third party ( other than the Licensee and its employees) in the UAE -referred to as “Outsourcing”.

The Licensee may outsource the requirements under paragraph (c) (d) and (e) of Article 6.2 of the Regulations to a third part provider, which may include a company related thereto, provided that any such outsourcing arrangements do not violate any existing regulatory requirements that a Licensee may subject to.

Where an entity outsources its activities to third party service providers it may still be able to meet economic substance requirements, provided its service providers conduct the activity in the UAE, and the entity must be able to demonstrate adequate supervision of the outsourced activity.

Article 4.3(h) of the Guidance states certain criteria that the third-party service providers must meet including such as having adequate activities, employees, expenditures and premises in the UAE.

Further, Article 4.3(h)5 of the Guidance explains that a Licensee who uses a third-party service provider must demonstrate to the Regulatory Authority that outsourcing is not being done with the objective of circumventing compliance with the Economic Substance Test. This is perhaps one topic on which the Guidance may have created more potential confusion than clarification. It is not clear under what circumstances outsourcing would be deemed to be circumventing compliance.

As per the Regulations and Article 5.1 of the Guidance, a holding company is defined as an entity that derives income purely from capital gains and receipt of dividends. Under the Regulations, such Holding Company Business is only required to meet reduced substance test as per the following:

Satisfaction of all reporting requirements under its regulating law; and
Maintaining adequate employees and premises for holding and managing the Holding Company Business.
Therefore, the entities, whose activities are limited to holding equity participation, there is no requirement that the License that carries on such form of Holding Company Business carries out a CIGA in the UAE.

However, it should also be noted that holding companies deriving income from activities other than capital gains and receipt of dividends do not benefit from the said exemption and are required to meet full standard of economic substance tests due to their carrying out of such activities.

The Guidance further explains that:

“A Licensee which owns other forms of assets (e.g. bonds, government securities, interest in real property) will clearly not be a “pure equity holding’ entity (even if it also owns equity participation) and will not be treated as carrying on Holding Business under this Article 5.1.

Because it is possible for a Licensee to carry on more than one Relevant Activity, the fact that the Licensee is a pure equity holding entity’ does not preclude the possibility that it may carry on one or more other relevant activities, in which case the CIGA shall be those associated with the income generated.”

Article 5.2 of the Guidance explains that whether an entity carries on a headquarters business for the purposes of the Regulations is entirely dependent on the services it provides to other group companies whether parents or subsidiaries. Headquarters Business are related to (i) taking relevant management decisions;(ii) incurring expenditures on behalf of other entities in the Group(iii) co-ordinating activities of the Group

Further, the definition of the Head Business means that the business of providing any of the following services to one or more Foreign Connected Person by the Licensee.

(a) the provision of senior management.

(b) the assumption or control of material risk for activities carried out by, or assets owned by, any Foreign Connected Person.

(c) the provision of substantive advice in connection with the assumption or control of risk referred to in paragraph (b) of this Definition.

Foreign Connected Person means a Connected Person that is not resident or deemed as a resident in the State

Therefore, the meaning of the term “Group” must be understood as it appears as an element in the definitions of “headquarters business”,

Intellectual Property Business means a business that holds, exploits or receives income from the Intellectual Property Asset(s).

Intellectual Property Asset means any intellectual property right in intangible assets, including but not limited to the copyright, patents, trademarks, brand, and technical know-how, from which identifiable income accrues to the business (such income being separately identifiable from any income generated from any tangible asset in which the right subsists).

The Regulations identify certain activities relating to Intellectual Property Business as high risk and set out additional conditions that a Licensee carrying out such activities must satisfy.

Article 5(3) of the Guidance describes that because income derived from Intellectual Property Assets activity poses a greater risk of artificial profit shifting as compared to income from non-IP related activity. There is a presumption under the Regulations that a Licensee who carries out such activities is not complying with the Economic Substance Test due its high risk. The burden is placed on the Licensee to rebut this presumption by providing sufficient information demonstrating that the Licensee does and historically has exercised a high degree of control over the development, exploitation, maintenance, enhancement and protection of the Intellectual Property Asset by an adequate number of full-time employees, with the necessary qualifications, who permanently reside and perform their activities in the UAE.

A High-Risk IP Licensee must further show sufficient evidence that decision making is taking place within the UAE by meeting the following criteria:

Taking strategic decisions and managing as well as bearing the principal risks related to development and subsequent exploitation of the intangible asset generating income, (b) risk relating to the acquisition by third parties and subsequent exploitation and protection of the intangible asset and (c) carrying on the ancillary trading activities through which the intangible assets are exploited leading to the generation of income from third parties.
Under Article 7(1) of the Regulations, the Regulatory Authority may determine that a licensee has not met the Economic Substance Test during the Financial Year of the Licensee provided that such determination is made no later than six (6) years from the end of the Financial Year to which the determination relates.

Article 4.4 of the Guidance explains that while the Regulations do not prescribe a set period for the retention of information by a Licensee, it is advisable to retain information relevant to evidencing compliance for a period of at least six (6) years.

As per the Regulations, the Financial Year means the annual accounting Financial year of the business of a Licensee as specified in the constitutional documents of the Licensee.


Article 9 of the Regulations dealt with the exchange of information with Foreign Authority

Article 9(3) of the Regulation states:

“Upon receipt by the Competent Authority of notification containing information that a Licensee has not met the Economic Substance Test for a Financial Year from a Regulatory Authority pursuant to the above Clause 2, the Competent Authority shall, pursuant to an international agreement, treaty or similar international arrangement to which the State is a party, provide the information relating to such Licensee to –

the Foreign Competent Authority of the country or territory in which resides the parent company, the ultimate parent company, and the Ultimate Beneficial Owner of the Licensee.
If the Licensee is incorporated outside the State, the Foreign Competent Authority of the country or territory in which the Licensee is incorporated.
Entities undertaking certain “high-risk intellectual property” business will be subject to relatively higher standards of economic substance tests and more detailed reporting requirements

Further Article 6.4 of the Guidance states that the Competent Authority shall provide information to the Foreign Competent Authority:

A Licensee fails to meet the requirements under the Regulations for a specific Financial Year; or
the Licensee carries out a High-Risk IP Business.


A Company would commit an offense and be liable to an administrative penalty of between AED 10,000 and AED 50,000 if it either fails to provide the required information or knowingly provides inaccurate information.

A similar penalty would be applied for failure to meet the Economic Substance Test. This increases to between AED 50,000 and AED 300,000 in the subsequent year(s).

Failure to comply may lead to administrative action including suspension or strike off, deregister, suspend, revoke or deny renewal of a company’s license. The Ministry of Finance also has the authority to report any non-compliance to a company’s foreign regulators, subject to the provision in international agreements (e.g. double tax treaties) , which could attract strong and unwanted scrutiny.


An administrative penalty under Article 10 or Article 11 of this Resolution may not be imposed after the lapsing of six (6) years beginning with the date on which the Licensee became liable to the penalty; and in the case of a Licensee liable to a penalty under Article 11 of this Resolution, of an administrative penalty shall not be imposed after the lapse of twelve (12) months beginning with the date on which the inaccuracy first came to the attention of the Regulatory Authority


Licensee upon whom a penalty is imposed by the Regulatory Authority may appeal against it on any of the following grounds;

(a) that liability to that penalty does not arise.

(b) Appeal against its amount.

An administrative penalty under this Resolution must be paid on or before the date mentioned in any of the following dates, whichever is taking place first:

the date upon which the administrative penalty is due
the date on which the appeal is finally determined or withdrawn
Further, the authorized personnel of the Regulatory Authority has the power to enter Business Premises at any reasonable hours to examine and take copies of any Business documents for the purpose of investigation relating to the compliance with any provision of the Regulation.


First to understand the Regulations and examine if any UAE entities are within the scope of the economic substance requirements. Then the second step is to access the activities. The key area to be assessed will be whether the activities qualify as CIGA or entity performs Relevant Activities as specified above under Article 5 of the Regulations.

The Resolution should have a very limited impact on companies that have an income-generating presence in the UAE and undertake genuine business activities on the ground. However, the income-generating entities which are managed remotely should be examined and reassessed in light of the Regulations.

The requirements for Holding Companies to have their own premises will need a practical solution. Holding Company or Businesses with a nominee or ADGM/DIFC holding company, trust structure should review any such structures and the source of income coming to the said holding structure carefully in light of the Resolution to avoid any violation of the Regulation. If so, start to rectify and comply with the annual reporting in line with the new requirements.

Further, the Regulations should also have a very limited impact on headquartered businesses in UAE and foreign multinationals which are conducting genuine business operations and management in the UAE (apart from complying with additional disclosure requirements required by the Regulations). However, multinationals that undertake Relevant Activities in the UAE but are managed remotely, the corporate governance structure and operating model should be examined and reassessed in light of the UAE economic substance requirements, and any necessary adjustments should be made to ensure compliance with the Regulations

As regards the Offshore entities, most of the UAE Offshore entities are out of the scope of the ESR as many of the Relevant Activities specified under Article 5 of the Regulations are not available especially at Jebel Ali ( JAFZA) Offshore and RAK ICC Offshore except few.

UAE entities that hold intellectual property and those that outsource a significant amount of their activities will be particularly affected.

Insurance, banking, lease financing, and investment fund management entity is licensed by the relevant UAE licensing authority to carry out any of these activities in the UAE, they will be required to comply with the Economic Substance Rules.


The Companies /Licensee should Identify gaps ( method of identifying the current business structure, activities, legal and regulatory factors, and compliance ) in the level of economic substance in affected entities and consider what remedial action plan should be taken to ensure that the requirements are complied with successfully where gaps are identified


Licensee/Companies should clearly identify an action plan for compliance with the filing requirements set out in the Regulations.

It is advisable that all Companies /Licensees in the UAE should examine its business activities and make an assessment based on the Regulations and Guidance as to whether they are subject to UAE Economic Substance Regulations and those that are subject to the Regulations should start initiating steps to ensure compliance with the Regulations.

However, as specified above, the Regulatory Authority has not been appointed yet but the Guidance states that reporting requirements will commence on 1 January 2020 so it is anticipated that the Regulatory Authority will be appointed soon.

Therefore, the Licensee/Companies fall within the scope of Regulations should start to take the necessary steps to comply with the Regulations as soon as possible.


Note: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.