UAE Economic Substance Regulations: Five Things You Need to Know

October 02, 2019

Entities carrying on “Relevant Activities,” including banking, insurance, and investment fund management, among others, in the United Arab Emirates will need to meet an economic substance test from April 30, 2019, and from 2020, must make reports to a regulatory authority in order to comply with a new set of regulations.

1. The United Arab Emirates (UAE) Cabinet of Ministers (Cabinet) has issued the Economic Substance Regulations (the Regulations) in response to the inclusion of the UAE on the European Union’s March 12, 2019 “blacklist” of noncooperative jurisdictions for tax purposes. The Regulations were supplemented on September 11, 2019, by Ministerial Decision No. 215/2019 (the Guidance) to provide guidance on meeting the economic substance test for compliance with the Regulations.

2. The Regulations apply to all entities carrying on a “Relevant Activity,” defined below, in the UAE, including entities established in free zones and financial free zones such as the Dubai International Financial Centre and the Abu Dhabi Global Market.

3. Such entities must exhibit demonstrable economic substance as of April 30, 2019, and thereafter or will risk fines and administrative penalties.

4. Starting in 2020, such entities will have to make reports and notifications to the regulatory authority (in the form and manner to be specified by such authority), or will risk fines and administrative penalties.

5. The “regulatory authority” for the purposes of the Regulations has not yet been designated by the Cabinet, and the format of these reports and notifications is not yet known. These details are expected to be confirmed in supplementary legislation, but there is no prescribed or published timeframe for issuance.

Scope of the Regulations

The Regulations apply to companies carrying out Relevant Activities in the UAE, including those established in free zones. “Relevant Activities” include involvement in or serving as the following:

  1. Banking
  2. Insurance
  3. Investment fund management
  4. Finance leasing
  5. Headquarters
  6. Shipping
  7. Intellectual property
  8. Holding company
  9. Distribution and service center

If a company is conducting a Relevant Activity in the UAE (a Licensee), it now has to (1) meet the economic substance test described below for each Relevant Activity that it conducts, and (2) make annual notifications and reports, as discussed below, to the regulatory authority.

The only current exception to these requirements is for companies that are at least 51% owned directly or indirectly by UAE federal or Emirate-level governmental authorities.

The Economic Substance Test

In order to meet the economic substance test, a Licensee must meet all of the following criteria:

  1. It conducts the relevant “Core Income-Generating Activity,” as specified in the Regulations, in the UAE.
  2. It is directed and managed in the UAE in relation to that activity.
  3. It has an adequate number of qualified full-time employees who are physically present in the UAE.
  4. It incurs adequate operating expenditure in the UAE.
  5. It has adequate physical assets in the UAE.

Special Cases

  1. Holding company Licensees are subject to a less stringent economic substance test, particularly in relation to the nature of their income and availability of human resources.
  2. Licensees undertaking certain intellectual property activities deemed to be “high risk” by the Regulations are, conversely, subject to additional requirements.
  3. Where a Licensee outsources its activities to service providers, it may still be able to meet the economic substance test, provided its service providers conduct the activity in the UAE and the Licensee can demonstrate adequate supervision of and expenditure on the outsourced activity.

Reporting Requirements

The Regulations require each Licensee to notify the regulatory authority on an annual basis of its Relevant Activities, its financial year, and whether any of its associated income is subject to tax outside of the UAE. Within 12 months of the end of each financial year, a Licensee must submit a report to the regulatory authority declaring whether it met the economic substance test for such financial year, including details of its activities, income, expenditure, physical assets, and personnel. Additional requirements apply to Licensees undertaking “high risk” intellectual property activities. The Regulations contemplate that this information may be shared with authorities in other states, including the jurisdiction of any parent company or ultimate beneficial owner of the Licensee.

Failure to meet the economic substance test or make the required notifications and reports will result in fines of up to 50,000 UAE dirham (AED) (approximately $13,600), and for violations continuing for more than a year, fines of up to AED 300,000 (approximately $81,700), subject to a six-year limitation period. The regulatory authority will also have the power to impose other penalties, including the suspension, revocation, or nonrenewal of a Licensee’s trade license, which would prevent it from doing business in the UAE.


The introduction of the Regulations affirms the UAE’s commitment to addressing concerns around profit shifting and meeting the EU’s requirements for removal from the “blacklist.” This development is also in line with a number of other jurisdictions that have recently issued similar economic substance rules (e.g., Cayman Islands).

Entities that undertake Relevant Activities within the UAE will need to assess their operations and governance in light of the new economic substance test.


For assistance in undertaking a review of operations and in determining whether any adjustments are necessary to ensure compliance with the Regulations, please do not hesitate to contact any of the following Morgan Lewis lawyers:

Ayman A. Khaleq
Carolyn J. D. Abram

Abu Dhabi
Mark J. Gilligan