UAE Economic Substance Regulations Law

The UAE introduced  Resolution on Economic Substance (Cabinet of Ministers Resolution No.31 of 2019, the “Regulations” or “UAE Economic Substance Law” ) on 30 April 2019, which was supplemented by further guidance issued on 11 September 2019. To provide further clarity on the various terms used in the Regulations, the UAE has issued 41 FAQs in January 2020.

This Video explains the reasons for introduction of the UAE Economic Substance Regulations and the developments therein : –

While the additional FAQ’s mainly clarify the provision of the UAE Economic Substance Law issued earlier, some of the noteworthy points included in the FAQ’s are as under : –

A. Applicability of UAE Economic Substance Regulations and its scope

What is the Period covered by the UAE ESR Regulations : – 

    • The Regulations apply to financial years commencing on or from 1 January 2019.

What are the compliance for companies covered by ESR Regulations ?

    • Entities that are governed by the Regulations will need to submit : –
      • Notification to their Regulatory Authority (defined under Cabinet Decision No(58) of 2019 issued on 4 September 2019) from 1 January 2020 onwards; and
      • Economic substance declaration within 12 months from the end of their financial year to the same Regulatory Authority (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019).

Do the regulations apply to us even if we have not earned income from relevant activity in a financial period ?

    • A Licensee that undertakes a Relevant Activity but does not earn income from this activity in a financial period would need to submit a notification with its Regulatory Authority, but it is not required to file an Economic Substance Return for the relevant financial period.

My ownership is completely local. Am I still covered by the Regulations ?

    • Regulations apply to both UAE entities that are part of a foreign multinational group, or any UAE entity which carries on a Relevant Activity even though it is not a part of a foreign multinational group. However, UAE based Distribution Business, Service Centre Business, Headquarter Business or High-Risk IP Business would only be within the scope of the Regulations if the UAE entity transacts with foreign group companies.

For ESR, is my local income excluded ?

    • The Licensee needs to demonstrate economic substance in the UAE for domestic income as well as income earned from outside of the UAE.

An activity is not stated on my commercial license but is actually undertaken by us. Are we covered ?

    • It has been clarified that a ‘substance over form’ approach must be used to determine whether a Licensee undertakes a Relevant Activity or not. This would mean looking beyond what is stated on the commercial license to the activities actually undertaken by the Licensee during a financial period.

B. UAE Economic Substance Regulations – First reportable Financial Year

Since the Regulations apply to financial years starting on or after 1 January 2019, if the financial year starts after 1 January 2020, there is no need to comply with the Regulations for the period 1 January 2019 date immediately preceding the beginning of the FY.

Example: For a UAE company with 1 April 2019 – 31 March 2020 financial year, first assessable period would be 1 April 2019-31 March 2020 and the UAE company need not comply with the Regulations for the period 1 January 2019 – 31 March 2019.

3.      Demonstrating Economic Substance  in the UAE

    • Given that businesses vary in size and nature, what is adequate and appropriate to meet Economic substance will depend on the nature and level of activities carried out, and the level of income earned by the Licensee. Regulatory Authorities would be expected to take a pragmatic approach to determine if a Licensee has met the Economic Substance Test, considering the type and level of activity of a Licensee.
    • Determination of economic substance shall be assessed on a Licensee by Licensee basis, and not on a consolidated group basis. However, relevant economic substance (staff, functions, assets etc.) maintained in the UAE by other group companies can be taken into account if that economic substance is made available to the Licensee under a service / outsourcing type arrangement
    •  Adequate number of board meetings should be held in the UAE, depending on the nature and extent of the Relevant Activity being undertaken by the Licensee.
    •  It has been clarified that having a UAE tax residency certificate in itself is not a proof of meeting the Economic Substance Test.
    •  Employees who perform CIGAs of a Licensee would in principle need to be resident in the UAE, but non- resident can be considered if relevant activities are performed while they are physically present in the UAE and certain other conditions are satisfied
    • Directors need to be physically present in the UAE to attend relevant board meetings of the Licensee and can be counted as employees if they also perform CIGAs.
    • UAE Tax Residency Certificate in itself is not proof of a Licensee having adequate economic substance in the UAE in relation to is Relevant Activity and the income earned from this activity.
    • A Licensee cannot outsource the activities of being “directed and managed”, as the Licensee is required to demonstrate oversight and control of its Relevant Activity in the
    • Outsourcing can be done  related parties or to third party service providers. Further, activities that are not CIGAs (e.g. backoffice functions) can be outsourced to service providers outside the UAE

4. Administration of UAE Economic Substance Regulations

  • A Licensees undertaking a Relevant Activity needs to submit a simple notification with its Regulatory Authority , even if they qualify for an exemption under the Regulations or have not earned income from the Relevant Activity during the relevant financial period
  • Licensees that earn income from a Relevant Activity during the relevant financial period and are not exempt from the Regulations are required to demonstrate economic substance in the UAE and file an economic substance return within 12 months from the end of the relevant financial period.

5. Sample activities that Licensee can consider undertaking before the end of a financial period

The UAE Economic Substance Law provide that the following is a non-exhaustive list of matters, which a Licensee should consider undertaking before the end of a financial period:

  • Assess what (if any) Relevant Activities have been 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.

The Notification also provides certain additional clarifications in respect of each of the Relevant activities. The copy of the Notification can be accessed at

For any queries, write to us at


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