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Economic Substance Regulations

​ As part of the UAE’s 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 (“EU”) Code of Conduct Group on Business Taxation, the UAE introduced a Resolution on the Economic Substance (Cabinet of Ministers Resolution No.31 of 2019, the “Regulations”) on 30 April 2019.  Guidance that provides further clarity on the application of the Regulations was issued on 11 September 2019. The Regulations require UAE onshore and free zone companies and other UAE business forms that carry out any of the “Relevant Activities” listed below to maintain an adequate “economic presence” in the UAE relative to the activities they undertake. 

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 Centre Business​


The Regulations provide a definition to each of the above Activities. The provisions of the Regulations shall not apply to Companies in which the Federal Government of the UAE or the Government of any Emirate of the UAE, or any governmental authority or body or any of them has at least 51% direct or indirect ownership in their share capital. The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are governed by the Regulations will need to submit a notification to their Regulatory Authority (defined under Cabinet Decision No (58) of 2019 issued on 4 September 2019) from 1 January 2020 onwards, and prepare and submit to the same Regulatory Authority an economic substance declaration  within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019). An entity is not required to meet the economic substance test and file an economic substance declaration for any financial period in which it has not earned income from a Relevant Activity. Failure by an entity to comply with the Regulations shall result in administrative penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), and potential suspension, revocation or non-renewal of its registration.




A. The Economic Substance Regulations

1.Why has the UAE introduced Economic Substance Regulations?

The UAE introduced Economic Substance Regulations to honour the UAE’s commitment as a member of the OECD Inclusive Framework on BEPS, and in response to a review of the UAE tax framework by the EU which resulted in the UAE being included on the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist). The issuance of the Economic Substance Regulations on 30 April 2019 (the Regulations), and the subsequent release of the Guidance on the application of the Regulations on 11 September 2019, was a requirement for the removal of the UAE from the EU Blacklist on 10 October 2019. The purpose of the Regulations is to ensure that UAE entities that undertake certain activities (see question 4) are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE.

2.What is the first reportable Financial Year?

The Regulations apply to financial years starting on or after 1 January 2019. Example 

1: A UAE company with 1 January 2019 - 31 December 2019 financial year: First assessable period would be 1 January 2019 - 31 December 2019. Example 

2: A UAE company with 1 April 2019 - 31 March 2020 financial year: First assessable period would be 1 April 2019 - 31 March 2020. No need to comply with the Regulations for the period 1 January 2019 - 31 March 2019.

3.Who are the “Regulatory Authorities”?

The Regulations are administered by the Regulatory Authorities listed in Cabinet Resolution No (58) of 2019 Determining the Regulatory Authorities Concerned with the Business Mentioned in Cabinet Resolution No (31) of 2019 Concerning Economic Substance Regulations (link below) https://www.mof.gov.ae/en/lawsAndPolitics/CabinetResolutions/Documents/Cabinet%2BResolution%2BNumber%2B58%2Bof%2B2019.pdf

K. Administration

38. Who needs to notify by 30th June 2020?

Only businesses that undertake a Relevant Activity with a financial year commencing on or after 1 January 2019 and ending on or before 31 December 2019 are required to submit a Notification by 30 June 2020.

39. When should a business with a financial year that ends after 31 December 2019 (e.g. a financial year ending 31 March 2020 or 30 June 2020) submit a Notification?

Whilst your Regulatory Authority may allow or request you to file a Notification for financial periods ending after 31 December 2019 (for example, 31 March 2020 or 30 June 2020) by 30 June 2020, this is not a requirement under the Economic Substance Regulations. The statutory deadline for periods ending after 31 December 2019 will be communicated in due course. No Economic Substance administrative penalties will apply to businesses with a reportable period ending after 31 December 2019 for Notifications not submitted by 30 June 2020.

40. Who needs to file an economic substance return and by when?

Only Licensees that earn income from a Relevant Activity during the relevant financial period and that are not exempt from the Regulations are required to demonstrate economic substance in the UAE and file an economic substance return. Economic substance returns must be filed within 12 months from the end of the relevant financial period.

41. What are the penalties for non-compliance?

Failure to Notify: AED 10k to 50k Failure to provide accurate or complete information: 

● Penalty of AED 10k to 50k; and 

● Deemed failure to demonstrate economic substance in the UAE Failure to demonstrate sufficient economic substance in the UAE for the relevant Financial Year: First failure 

● Penalty of AED 10k to 50k; and 

● Information exchange with foreign competent authority of: (1) parent company, (2) ultimate parent company, and (3) ultimate beneficial owner. Second consecutive instance of failure 

● Information exchange with foreign competent authority of: (1) parent company, (2) ultimate parent company, and (3) ultimate beneficial owner; and 

● Penalty of AED 100k to 300k; and 

● Trade / commercial licence could be: suspended, withdrawn or not renewed.

42. 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 form” approach); 

● 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 records) 

● 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 contractual agreements. 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. ​​​​​​

L. Notification

What is the purpose of the Notification?

The Notification is a method for Regulatory Authorities to collect certain initial information in respect of Licensees and their activities in the UAE for the relevant Reportable Period. The information provided as part of the Notification is a prerequisite to filing an Economic Substance return for the same period (if required).

Who needs to submit a Notification?

A business must submit a Notification to their Regulatory Authority if it undertakes any of the following Relevant Activities during the relevant accounting period:

  • Banking Business
  • Insurance Business
  • Investment Fund Management Business
  • Lease-Finance Business
  • Headquarter Business
  • Shipping Business
  • Holding Company Business
  • Intellectual Property Business
  • Distribution and Service Centre Business

Please refer to the Relevant Activity Guide for further information and an explanation on each of the above Relevant Activities.

What is the Reportable Period?

The Reportable Period is the financial period to which the Notification relates to that commenced on or after 1 January 2019.

The end of the Reportable Period should correspond to the financial year [end] of the business, and the period that financial statements (if any) are prepared.

What period should the information provided by the Licensee in the Notification relate to?

The information provided by a Licensee in the Notification should relate to the Licensee’s Reportable Period.

For example, a Licensee submitting a Notification in June 2020 for the Reportable Period ending 31 December 2019 should provide information for the period 1 January 2019 (or a later date for a Licensee that was established after 1 January 2019, but that has set a first 31 December 2019 financial year end) to 31 December 2019.

What is the deadline to submit the Notification to the Regulatory Authority?

30 June 2020 for businesses with a financial year commencing on or after 1 January 2019 and ending on or before 31 December 2019. The statutory deadline for businesses with a different financial year end will be communicated in due course.

What if the business has a financial year that ends after 31 December 2019, e.g. a financial year ending 31 March 2020 or 30 June 2020?

Whilst your Regulatory Authority may allow or request you to file a Notification for financial periods ending after 31 December 2019 (for example, 31 March 2020 or 30 June 2020) by 30 June 2020, this is not a requirement under the Economic Substance Regulations. The statutory deadline for periods ending after 31 December 2019 will be communicated in due course.

No Economic Substance administrative penalties will apply to businesses with a reportable period ending after 31 December 2019 for Notifications not submitted by 30 June 2020.

What if the business has a financial year that started in 2018 and ended during 2019 (e.g. 1 July 2018 to 30 June 2019) - is the business required to file a Notification?

No. The economic substance regulations only apply to financial years commencing on or after 1 January 2019.

In the above example, the Licensee's first reportable period will be 1 July 2019 to 30 June 2020, and there is no statutory requirement for the business to file a Notification for this period by 30 June 2020. The statutory Notification filing deadline for the period ending 30 June 2020 will be communicated in due course.

What if the business has a long first accounting period which started in 2018 and ended during 2019 (e.g. 1 June 2018 to 31 December 2019) - is the business required to file a Notification for this period by 30 June 2020?

No, in the above example, the Licensee's first reportable period will be 1 January 2020 to 31 December 2020 and the first Notification would be due in 2021, the deadline for which will be communicated in due course.

If the business does not undertake a Relevant Activity - is it still required to file a Notification?

Under the Economic Substance Regulations, only businesses that undertake a Relevant Activity during a Reportable Period are required to submit a Notification. However, certain Regulatory Authorities may request all businesses to submit a Notification, regardless of their activity.

If the activity of a business has changed during a Reportable Period - which activity should be reported in the Notification?

The business must report all Relevant Activities undertaken during the Reportable Period.

Where can a Licensee find who is their Regulatory Authority?

The relevant Regulatory Authorities for the purposes of the Economic Substance Regulations are set out in Cabinet of Ministers Resolution No. 58 of 2019. In general, the Regulatory Authority is the authority that has issued the trade license / permit to the business. The main exceptions to this general rule are for:

  • Businesses registered onshore, which would need to submit their Notification with the Ministry of Economy
  • Banks that are licensed by the UAE Central Bank (for their entities that are not licensed / regulated by the DIFC or ADGM)
  • Insurance companies that are regulated by the Insurance Authority
  • Investment Fund Management Businesses that are licensed by the Securities and Commodities Authority

Where a Licensee has a dual license, it should only submit one Notification to the Regulatory Authority that issued the Licensee’s primary/main trade/commercial license when it was first incorporated / registered in the jurisdiction in which such Licensee has its premises, employees and other relevant Business Documents.

Is the Notification an annual requirement?

Yes, a Notification must be filed every year.

How to submit a Notification?

Please consult with your Regulatory Authority to confirm the mechanism for submitting the Notification.

Can a single Notification be filed for multiple Licensees?

No, each Licensee must file a Notification on a stand-alone basis, irrespective of whether the Licensee is part of a consolidated group for accounting purposes.

What if a business was incorporated / registered after the Economic Substance Regulations was enacted - is it required to file a Notification by the 30 June deadline?

The Economic Substance Regulations apply to financial years starting on or after 1 January 2019. Any Licensee with a financial year that commences on or after 1 January 2019 and which ends on 31 December 2019 will be required to file a Notification no later than 30 June 2020, irrespective of when the Licensee was incorporated / registered.

For example, a Licensee that was incorporated after the Economic substance Regulations were enacted (e.g. May 2019) that has set a 31 December 2019 financial year end would be required to file a Notification by 30 June 2020.

What if the Licensee is in the process of liquidation - does it still need to file a Notification?

Licensees that are in the process of liquidation that carries out a Relevant Activity and derives Relevant Income in the year of liquidation, the entity or its liquidators must ensure that all obligations under the ESR Regulations are satisfied, including filing a Notification and Report for the period up to liquidation (where applicable).

Should a business only look at their commercial licence, trade licence or permit to determine if they undertake a Relevant Activity?

No, businesses should take a ‘substance over form’ approach to determine whether or not they carried on a Relevant Activity. This means looking beyond what is stated on the commercial licence, trade licence or permit and making an assessment based on the activities actually undertaken during the Reportable Period.

Should a Licensee consider “net accounting profit” to determine whether or not it earned income from a Relevant Activity?

No. Income from a Relevant Activity means the gross income earned from that activity as recorded in the books and records for the Reportable Period prepared under applicable accounting standards, including income that is generated outside of the UAE, and without deducting any type of costs or expenditure. In the context of income from sales or services, gross income means gross revenues from sales or services without deducting the cost of goods sold or the cost of services.

How can the income earned from a Relevant Activity be subject to tax outside the UAE?

Income from a Relevant Activity is considered to be subject to tax outside the UAE where:

  • The Licensee has a taxable presence / permanent establishment in a foreign country and it reports all or part of the income from the Relevant Activity in the corporate income tax return filed in that foreign country; or
  • The Licensee is a UAE branch of a foreign juridical person and all the income of the UAE branch is reported in the foreign juridical person’s corporate income tax return, even if the foreign jurisdiction exempts branch profits from corporate income tax.

How do you determine if a Licensee is a High Risk IP Licensee?

A Licensee is a High Risk IP Licensee if it receives income from an Intellectual Property ("IP") Asset and meets all of the following three requirements:

  1. The Licensee did not create the IP Asset which it holds for the purpose of its business, and
  2. The Licensee acquired the IP Asset from either - a. A group company, or b. In consideration for funding research and development by another person situated in foreign jurisdiction, and
  3. The Licensee licenses or has sold the IP Asset to one or more group companies, or otherwise earns separately identifiable income (e.g. royalties, licence fees) from a foreign group company in respect of the use or exploitation of the IP asset.
  4. Please refer to Relevant Activity Guide for further information in respect of High Risk IP Licensees.

What is a “Parent Company”?

  1. holds a majority of voting rights in the Licensee; or
  2. has the right to appoint or remove a majority of the boards of directors of the Licensee; or
  3. controls alone, pursuant to a joint arrangement with other shareholders or members, a majority of the voting rights in the Licensee; or
  4. has the right to exercise, or actually exercises, dominant direct influence or control over the Licensee.

What is an “Ultimate Parent Company”?

The entity that:

  1. directly or indirectly owns a sufficient interest in the Licensee, such that it is required to prepare consolidated financial statements under accounting principles generally applied in its jurisdiction of tax residence, or would be so required if its equity interests were traded on a public securities exchange in its jurisdiction of tax residence; and
  2. there is no other entity in the group that owns directly or indirectly an interest described in subsection (a) above in the entity under (a)

What is an “Ultimate Beneficial Owner”?

An individual who directly or indirectly owns twenty five percent (25%) or more of the share capital of the Licensee.

A Licensee may have one or more Ultimate Beneficial Owners

In what cases can a Licensee be tax resident outside the UAE?

A UAE Juridical person (e.g. a LLC or PJSC) is considered tax resident outside the UAE if another country treats the UAE entity as a local company under its corporate income tax legislation (usually on the basis of a central management and control type test) and the income of the UAE entity is subject to corporate income tax in the foreign country because of its tax residence there. ​​​​​​​


Page last updated : 22/06/2020 9:48 AM