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UAE Updates Economic Substance Regulations

  • Legal Development 22 September 2020 22 September 2020
  • Middle East

  • Corporate

The UAE has recently issued updated Economic Substance Regulations which repeal and replace those announced in April 2019. The updated regulations introduce important changes to the economic substance regime that businesses operating in the UAE should be aware of.


Economic Substance Regulations (ESR) were introduced in the UAE with effect from 30 April 20191. The UAE Cabinet of Ministers has now issued updated Economic Substance Regulations  (Updated ESR)2 which repeal and replace the ESR. The UAE Ministry of Finance has also issued updated guidance (New Guidance)3 clarifying the Updated ESR.

Key Takeaways and Next Steps

  • The Updated ESR overrides the ESR.
  • Government entities are no longer exempt and are now subject to the Updated ESR. Unless they fall within one of the updated exemptions, these entities will have to comply with the Updated ESR.
  • Companies incorporated outside the UAE which operate in the UAE through branch offices, and companies which had previously concluded they carried out the Relevant Activity of Distribution and Service Centre Business, are amongst those that will need to carefully consider the impact of the Updated ESR on their previous economic substance analysis.
  • All UAE entities should re-assess whether their previous economic substance analysis is still accurate under the Updated ESR.
  • All UAE entities which fall within the scope of the Updated ESR will be required to submit (or re-submit) an economic substance notification to the UAE Ministry of Finance portal once it is available.
  • We would advise clients to carry out an analysis of the impact of the Updated ESR on their business as soon as possible, in anticipation of the requirement to submit (or re-submit) an economic substance notification.

A more detailed summary of some of the changes introduced in the Updated ESR follows below.

Definition of "Licensee"

In accordance with the Updated ESR, the definition of "Licensees" now applies to:

  1. any corporate person (incorporated inside or outside of the UAE); or
  2. an unincorporated partnership,

in the UAE which conducts a Relevant Activity.

Natural persons, sole proprietors, trusts and foundations which were previously considered "Licensees" under the ESR no longer fall within the scope of the definition.

Treatment of Branches

Companies incorporated outside the UAE which conduct a Relevant Activity in the UAE through a branch registered in the UAE do not need to demonstrate economic substance, provided that the relevant income earned through the branch is subject to tax in the jurisdiction in which the company is incorporated. This is a helpful clarification.

Where a company incorporated in the UAE conducts a Relevant Activity through a branch registered outside the UAE, the UAE company does not need to report and demonstrate economic substance, provided that income earned through the branch is taxed in the jurisdiction outside the UAE in which it is registered.

Exempt entities

In accordance with the Updated ESR, the following entities are now considered exempt from the economic substance regime:

  1. investment funds;
  2. entities which are a tax resident outside of the UAE;
  3. entities which are wholly owned by UAE residents and which are (i) not part of a multi-national group and (ii) only carry out their activities in the UAE; and
  4. branches of foreign companies subject to tax outside of the UAE.

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.

Amendments to definition of "Connected Person"

A "Connected Person" is now defined as an entity which is part of the same Group as the Licensee. A "Group" is defined as "two or more entities related through ownership or control such that they are required to prepare consolidated financial statements for financial reporting purposes under the accounting standards applicable thereto".

Changes to Relevant Activities:  Distribution and Service Centre Business

Previously, for an entity to be considered within scope of the Relevant Activity of "Distribution and Service Centre Business" imported goods had to be stored in the UAE. This requirement no longer applies.

Separately, services provided by entities are no longer required to be provided in connection with a business outside of the UAE. This implies any services provided to a foreign related party would fall within the remit of the "Service Centre" limb of this Relevant Activity.

Notification and Reporting

Article 4 of the Updated ESR provides a list of the relevant Regulatory Authorities. It further provides that the Regulatory Authorities are tasked with receiving the economic substance notifications, Economic Substance Reports and all other relevant supporting documents. In accordance with Article 8 of the Updated ESR, every Licensee is required to submit an annual economic substance notification  to the applicable Regulatory Authority (in the form stipulated by the Regulatory Authority) to notify whether or not it has carried out (i) a Relevant Activity and (ii) whether it has generated an income from that Relevant Activity.

Separately, however, the New Guidance stipulates that notifications must be filed directly via an online portal to be launched by the UAE Ministry of Finance within six months from the end of the Financial Year of the Licensee. The portal is yet to be launched.

We anticipate that further clarity will emerge as to how notifications will be processed between the Regulatory Authorities and the online portal launched by the UAE Ministry of Finance.

Licensees and Exempted Licensees who have already submitted notifications for the financial year 2019 are required to re-submit their notifications through the UAE Ministry of Finance portal. At the time of writing that portal has not yet been launched.

The UAE Ministry of Finance has indicated that statutory notification deadlines for companies with a financial year which ends after December 2019 will be communicated in due course.

National Assessing Authority

While each relevant Regulatory Authority remains involved in the process of collection and verification of information of their respective Licensees, the Federal Tax Authority has been appointed as the "National Assessing Authority" to oversee compliance and control of the Updated ESR. The "National Assessing Authority" will, among other things, (i) undertake assessments to determine if a Licensee has met the Economic Substance Test, (ii) impose penalties if applicable, (iii) hear and decide appeals and (iv) exchange information with the respective foreign authorities.


Penalties for non-compliance have increased and include, among other things:

  1. where Licensees or Exempt Licensees fail to submit their notifications (and any other documents or relevant information as requested by the Relevant Authority or the National Assessing Authority) an administrative fine of AED 20,000 may be imposed;
  2. where Licensees or Exempt Licensees fail to submit their Economic Substance Report or fail to meet the Economic Substance Test an administrative fine of AED 50,000 may be imposed; and
  3. where Licensees or Exempt Licensees submit inaccurate information to the Relevant Authority of the National Assessing Authority an administrative fine of AED 50,000 may be imposed.

Please email for further information

1 UAE Federal Cabinet Resolution No. 31 of 2019
UAE Federal Cabinet Resolution No. 57 of 2020
UAE Ministry of Finance Ministerial Decision 100 of 2020


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