Update to Economic Substance Regulations in the UAE

November 09, 2020

The United Arab Emirates (UAE) Cabinet of Ministers has recently issued updated Economic Substance Regulations which repeal and replace those previously announced. These are: the Ministry of Finance Resolution No. 57 of 2020, issued on 10 August 2020 (Resolution) and Ministerial Decision No. 100 of 2020, issued on 19 August 2020 (Ministerial Decision) on Economic Substance Regulations (Amendments).[1]

The Resolution repeals (i) the Cabinet of Ministers Resolution No. 31 of 2019, which introduced the Economic Substance Regulations (ESRs) in the UAE, and (ii) Cabinet Resolution No. 58 of 2019, which identified “Relevant Authorities” for each Relevant Activity. The Resolution therefore effectively combines the most updated ESRs into one single document. The Ministerial Decision, in turn, comprises the new official “Relevant Activity Guide,” repealing Ministerial Decision No. 215 of 2019 and replacing the previous Relevant Activity Guide issued by the Ministry of Finance in April 2020. It is intended to provide further guidance and directions to entities carrying out a Relevant Activity.


The ESRs 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. Such entities have to meet the Economic Substance Test (defined below) and make notifications and reports to the Ministry of Finance, or will risk fines and administrative penalties.

Relevant Activities

The Relevant Activities consist of:

  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

Economic Substance Test

In order to meet the economic substance test, a Licensee (as defined below) 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


Scope of Application

The definition of a “Licensee” has been narrowed down. The ESR now only applies to juridical persons and unincorporated partnerships that carry out a Relevant Activity (each a Licensee), while natural persons, sole proprietors, trusts, and foundations (that were also considered as Licensees under the original regulations) no longer fall under the scope of the ESR.

Moreover, the ESRs introduce four new exemptions from filing an economic substance report and the requirement to demonstrate substance in the UAE (Exempted Licensees). These Exempted Licensees are:

  • entities that are tax resident outside the UAE;
  • investment funds other than self-managed funds, and their underlying SPVs or investment holding entities (this exemption does not extend to either the fund manager or the entities in which the investment fund ultimately invests);
  • entities that are wholly owned by UAE residents and that are not part of a multinational group that only carries on business activities in the UAE; and
  • a UAE branch of a foreign entity that is subject to tax on all of its relevant income in a foreign jurisdiction.

However, it should be noted that under the former economic substance regime, entities with at least 51% UAE government ownership were exempt. Under the updated ESR, this exemption no longer applies.

Clarification on Treatment of Branches

The ESRs have clarified the treatment of branches and the applicability of the ESR to branches in the UAE. If the parent of a branch is registered in the UAE, it must file as a single Licensee, reporting the Relevant Activities of itself and all its UAE branches in one composite notification and/or economic substance report. In the case of UAE branches of a foreign entity, such a branch would have to comply with the regulations as if it was a separate legal person. However, the UAE branch might be able to benefit from an exemption which becomes applicable in cases where the relevant income of the branch is reported in the tax return of the foreign parent.

Relevant Activity Clarifications

There have also been changes to the definitions of certain Relevant Activities, including “Distribution and Service Centre Business” and “Holding Company Business.”

ESR Test Clarifications

There are no changes to the ESR tests which Licensees need to undertake, as well as the definitions of the core income generating activities, except certain minor clarifications and some additional guidance. For instance, the directors of the Licensee do not need to be resident in the UAE. However, a Licensee's board of directors must meet in the UAE at an adequate frequency having regard to the amount of decisionmaking required at that level and the activity levels of the Licensee. At such board meetings, there must be a quorum of directors physically present in the UAE and the board meetings must be recorded in written minutes and signed by the directors attending.

Regulatory Authorities

The Federal Tax Authority has been appointed as the “National Assessing Authority” and will be responsible for making the determination on whether a Licensee has economic substance in the UAE. The role of the other regulatory authorities (i.e., the Department of Economic Development, the Ministry of Economy, the Dubai International Financial Centre Registrar of Companies, and the Abu Dhabi Global Market Registration Authority) is to collect and verify information provided by Licensees within their remit and assist the Federal Tax Authority in its duties. Therefore, the role of the other regulatory authorities is now more limited under the ESR.

Reporting Requirements

Licensees and Exempted Licensees must now make notifications and submit economic substance reports to the Ministry of Finance rather than their competent regulatory authority through the Ministry of Finance online portal, which will go live the first week of December 2020. Businesses that already submitted notifications and/or economic substance reports to their regulatory authorities or whose notifications and/or economic substance reports were due before the Ministry of Finance portal was available, will be required to submit or resubmit these by 31 December 2020.


All notifications by Licensees and Exempted Licensees carrying out a relevant activity will need to be made within six months from such Licensee’s or Exempted Licensee’s financial year end. Notifications must include the (a) Relevant Activity, (b) gross income from the Relevant Activity, (c) financial year start and end dates, and (d) any other information as may be requested by the relevant authorities. Any entity which claims to be an Exempted Licensee must include with their notification evidence substantiating its status as Exempted Licensee.

Economic Substance Report

Licensees required to meet the economic substance test must submit their Economic Substance Report to the Ministry of Finance within 12 months after the Licensee’s financial year end (this deadline is unchanged). This must contain the following information:

  • Type of Relevant Activity conducted
  • Amount and type of gross income from the Relevant Activity
  • Amount and type of operating expenses and assets in respect of the Relevant Activity
  • Location of place of its business and, if applicable, plant, property, or equipment used for the Relevant Activity
  • Number of full-time employees with qualifications and number of personnel who are responsible for carrying on the Relevant Activity
  • Core Income-Generating Activity in respect of Relevant Activity being carried out by it
  • Financial statements
  • Declaration as to whether or not the Licensee satisfies the economic substance test
  • In the case of Relevant Activity being an intellectual property business, declaration as to whether or not it is a high-risk IP Licensee

There is also an increased reporting burden. All Licensees carrying out a relevant activity will now need to identify in their notifications/reports the jurisdiction in which their parent and ultimate beneficial owner claim to be tax resident.


The penalties under the ESR have now also increased and are as follows:

  • AED 50,000 for failure to submit report or failure to meet the requirements of the tests in the first year
  • AED 400,000 for failure to submit report or failure to meet the requirements of the tests in the second year
  • AED 50,000 for providing inaccurate information to the relevant regulatory authority or Federal Tax Authority
  • AED 20,000 for failure to submit a notification
  • License annulment for persistent noncompliance.


The new regulations require that Licensees undertake immediate action to achieve compliance. Therefore, all Licensees will need to revisit their earlier ESR classifications in light of these new regulations and conclude how and whether they fall within the purview of the revised regulations and prepare for resulting compliance requirements accordingly.


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

Ayman Khaleq
Carolyn Abram

Abu Dhabi
William Nash
Mark Gilligan
Ali Houssein

[1] This LawFlash follows up on our October 2019 LawFlash, UAE Economic Substance Regulations: Five Things You Need to Know.