The UAE defines Economic Substance

Publication July 2019


On April 30 2019, the UAE Cabinet issued Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance Regulations in the UAE (the Regulations), requiring all in-scope UAE entities which conduct certain activities (Relevant Activities) (detailed below) to have demonstrable economic substance in the UAE, effective immediately.

What is this in relation to?

The introduction of the Regulations follows the UAE’s firm commitment to comply with the EU requirements in order to be removed from the EU’s list of “non-cooperative” tax jurisdictions and illustrates the UAE’s ongoing efforts to reach the highest standards on taxation including the OECD’s requirements.

Who is subject to the Regulations?

The Regulations apply to all UAE onshore and free zone companies (including in the financial free zones) that carry on and generate income from one of the “Relevant Activities” listed below (Relevant Entities)1:

  • Banking
  • Distribution and service center
  • Fund management
  • Headquarters
  • Holding company
  • Insurance
  • Intellectual property (IP)
  • Lease-finance
  • Shipping

How does this impact the Relevant Entities?

The Relevant Entities must satisfy the following criteria to meet the Economic Substance Test :

  • Be directed and managed in the UAE in relation to the activity – the Regulations contain specific requirement on how a company has to be directed and managed in the UAE
  • Conduct core income generating activities in the UAE
  • Have an adequate number of qualified full-time employees in the UAE
  • Incur an adequate amount of operating expenditure in the UAE
  • Hold adequate physical assets in the UAE

There are certain regulations in respect of holding companies whose income and profits are derived only from their equity investments. Additional requirements apply if an entity carries out “high risk IP related activities”.

What does it mean in practice?

Each Relevant Entity must report specified information on its ‘Relevant Activities’ annually to the authority which has issued its trade license to demonstrate that it satisfies the economic substance requirements (this includes, for example, information on the relevant activities such as nature and amount of revenue, expenses, place of business and number of employees with qualifications). Existing entities will have to comply from 20 April 2019 onwards, with the first return due in 2020. New entities must comply with the Regulations upon receipt of their trade licences, with the first return due in 2002 (or later).

Sanctions for non-compliance

Failure to meet the economic substance test and/or to provide information (or providing inaccurate information) results in significant financial penalties, and ultimately, a deregistration. Additionally, the Regulations provide that the UAE authorities may exchange information about non-compliant UAE-registered companies with the tax authorities in the states where their parent companies and UBO’s are resident.

Issuance of executive/implementing regulations

Because the Regulations are of a high-level nature only, it is expected that supplemental regulations or decisions will be issued in due course to set out the detailed application of the Regulations, the reporting requirements and how it will be implemented. 



Entities which are either directly or indirectly owned by the UAE Government (both federal and local) are specifically excluded from the ambit of the Regulations.

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