Economic substance regulations overview

Economic substance regulations overview

The United Arab Emirates is committed to prevent harmful tax practices and has entered into various agreements with the OECD and EU CoCG for a framework of monitoring and reporting of UAE registered entities, their activities and in particular their assessment of an adequate economic presence in the UAE relative to the activities undertaken.

The Economic Substance Regulations (ESR) require UAE onshore and free zone companies, and certain other business forms (the "Licensees') that carry out any of the defined “Relevant Activities” to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (“Economic Substance Test”).  

The entities that are within the scope of reporting are:

  • Companies, both private and public
  • Joint Ventures
  • Partnerships, including LP, LLP and general partnerships

Trusts, Foundations, Natural Persons and Sole Proprietorships are excluded from the scope of ESR.

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 income derived from the relevant activity is defined as the Core Income Generating Activity (CIGA).

A Licensee can outsource any or all of its CIGAs so long as the outsourced activities are performed in the UAE. This means that a Licensee can use UAE based (i) employees and (ii) physical assets (including premises) of third parties or related entities to satisfy the Economic Substance Test. A Licensee cannot outsource “directed and managed", as the Licensee is required to demonstrate oversight and control of its Relevant Activity in the UAE.

A Licensee must review their activity annually based on their financial year and consider whether they have undertaken a Relevant Activity.

Based on this review, and within 6 months of the financial year end, the Licensee must inform the Ministry of Finance (MOF), via the online portal that they undertake a Relevant Activity.

Furthermore, within 12 months of the financial year end, the Licensee must file an Economic Substance Report with the MOF.

Penalties for non-compliance will lead to fines and sanctions of:

a) AED 20,000 for failure to issue a notification within 6 months,

b) AED 50,000 for failure to file a return within 12 months,

c) AED 50,000 for failure to provide accurate information,

d) AED 50,000 for failure to demonstrate sufficient Economic Substances,

e) AED 400,000 for failure to demonstrate sufficient Economic Substance for a second consecutive year.

In the event of failure to demonstrate Economic Substance, there will be an automatic exchange of information with the foreign competent authority of the parent company, ultimate parent company and ultimate beneficial owner, and the entity's commercial license could be suspended, withdrawn or not renewed.