The United Arab Emirates joined the OECD Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) on 16th May 2018 and committed to implement the following minimum standard actions:

Action n.  5: Harmful tax practices

Action n.  6: Prevention of tax treaty abuse

Action n. 13: Country-by-Country Reporting (“CbCR”)

Action n. 14: Mutual agreement procedures

Substantial activities requirements in no or only nominal tax jurisdictions is one of the three keys areas covered by Action 5. In order to comply with BEPS minimum standard action n. 5 the United Arab Emirates introduced new Economic Substance Regulations (“ESR”).


ESR has been adopted toward the following legislation.

Cabinet Resolution No. 31 of 2019 concerning ESR

Ministerial Decision No. 215 for the year 2019 on the issuance of directives for the implementation of the provision of the Cabinet Resolution No. 31 of 2019

Cabinet Resolution No. 58 of 2019 determining the regulatory authorities concerned with the business concerned in the Cabinet Resolution No. 31 of 2019

Who is actually affected by ESR?

The provision of ESR are addressed to any natural of juridical person (the “Licensee”) licensed by any competent licensing authority in the UAE exception made for government owned companies. As a matter of fact all companies established in UAE, including mainland companies, Free Zone companies and Offshore Companies, if not government owned, have to be aware of ESR regulation and timely comply with notification and reporting procedures as will be settled by competent Regulatory Authority, but only those companies that carried out “Relevant Activity” as described below will be actually affected the new regulations.

The objective of ESR is to determine the requirement and set out the criteria that confirms that a Licensee is carrying out an activity in U.A.E. that achieves economic substance interest so to satisfy OECD guidelines.

Only Licensee that carries on one or more of the following nine Relevant Activities (“Qualified License”) must meet the Economic Substance Test.

  1. Banking
  2. Insurance
  3. Fund management
  4. Lease-finance
  5. Headquarters
  6. Shipping
  7. Holding company
  8. Intellectual property (IP)
  9. Distribution and service centre


Notification and Reporting

With effect from 1st January 2020 Licensee shall submit to the Regulatory Authority a notification containing the following information

  1. Whether or not it carries out a Relevant Activity
  2. Whether or not all or any part of gross income related to the Relevant Activity is subject to tax in a jurisdiction outside UAE
  3. The date of the end of its financial year

Companies that do not carry out any of the nine Relevant Activity will be only required to notify that they are not involved in such activities.


In addition to the notification requirement, Qualified Licensee who derive income from Relevant Activities in the UAE each year must demonstrate to the Regulatory Authority that they have a sufficient degree of economic substance in the UAE which allows them to actually carry out the Relevant Activity in the UAE.

According to ESR all Qualified Licensee, no later than 12 months after the end of each financial year, shall have to prepare and submit to the Regulatory Authority (e.g. the Free Zone) a report including the following information:

  • Type of Relevant Activity Conducted
  • Amount and type of relevant income in respect to each Relevant Activity
  • Amount and type of operating expenses income in respect to each Relevant Activity
  • Location and place of business
  • Number of full-time employees
  • Information showing State Core Income Generating Activities that has been conducted (“SCIGA
  • Declaration whether or not the Licensee satisfies the Economic Substance Test
  • Detailed information concerning the activities outsourced

Substance Test

As a general rule a Licensee meets the Economic Substance Test in relation to a Relevant Activity in the following cases:

  • If the Licensee conducts so-called State Core Income Generating Activities (“SCIGA”) in the UAE.
  • If the Licensee is directed and managed in UAE.
  • If there is an adequate number of qualified full-time employees or adequate level of expenditure on outsourcing to third party service providers in UAE.
  • If there is an adequate operating expenditure incurred by it in the state, or adequate level of expenditure on outsourcing to third party service providers in UAE.
  • If there is adequate physical assets in the state or adequate level of expenditure on outsourcing to third party service providers in UAE.

Art.5 of Cabinet Resolution 31 provide a description of SCIGA that must be conducted in UAE with reference to each single Relevant Activity, although such description is open to interpretation.

For instance, in respect to Holding Companies Business, the SCIGA that must be conducted in UAE are “all activities related to that business”.

Less stringent requirements under the Economic Substance Test apply to holding companies which generate their income exclusively from dividends and capital gains and which do not engage in any other Relevant Activity. In contrast, stricter requirements are provided for Qualified License Holders Required to Report who generate income from intellectual property assets that are considered “high-risk”

ESR doesn’t provide analytic guidance on what “adequate” is for a specific activity.

The interpretation of “adequate” is left to a case-by-case consideration which depends on the nature and level of the Relevant Activity being carried out.

With reference to direction and management of the Licensee, ESR clarify that directors and managers must have the necessary knowledge and expertise for managing and directing and must not only give effect to decisions being taken outside the UAE. In addition, as evidence of management and directorship in the UAE, meetings of the board of directors shall be held in the UAE with adequate frequency. At such meetings, a quorum of directors must be physically present in the UAE

Regulatory Authority

The Regulatory Authority in charge of collecting notifications and reporting from Licensee and assessing whether or not the substance test is met can be UAE Central Bank, Insurance Authority, Security and Commodities Authority, Ministry of Finance or different Free Zone authorities.

The competent Regulatory Authority is determined by the activity carried out by the Licensee as well as the location where such Relevant Activity is carried out (i.e. mainland, free zone).

As of today the process for notifying the Regulatory Authority whether a Licensee falls under the scope of ESR and the process for reporting the information for the assessment of the substance test has not yet been implemented by all Regulatory Authority.

What happens if Economic Substance Test is not met?

Failing Economic Test requirements or providing false or inaccurate information may result in various penalties ranging from AED 10,000 to AED 300,000 and the Regulatory Authority may order the suspension, revocation or non-renewal of the license in the event of repeated infringement.




All companies registered in UAE should carefully assess if the activities that they carry out fall under one of the nine Relevant Activities. If this is the case a deep analysis has to be done in order to understand if Economic Substance Test requirements are met or if any adjustment has to be taken into consideration.


Among others, following actions may help to meet the Economic Substance Test requirements:

  • Migration from offshore company register to onshore Free Zone;
  • Upgrading flexi desk to real office
  • Outsourcing activities to qualified providers

We at Fidinam DMCC, stay at disposal of our clients, business partners and natural and judicial persons who might be affected by the Economic Substance Regulation to assist in case of needs.


Stefano Menotti – General Manager Fidinam DMCC



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