Economic Substance Regulations was introduced as part of UAE’s commitment as a member of the OECD Inclusive Framework to implement the action points of OECD base erosion and profit shifting framework for countries across the globe with low or no corporate taxes where harmful tax practices such as tax avoidance and evasion are prevalent. UAE is committed to ensure that the UAE’s legal and commercial framework is in line with global standards and is subject to review by the OECD to ensure that these standards are implemented UAE’s move to implement ESR also came in response to an assessment of the UAE’s tax framework by the European Union (EU) Code of Conduct Group on Business Taxation which required to introduce economic substance requirements in their domestic legislation.

The objective of the Economic Substance Regulations is to ensure that UAE entities which undertake certain activities are not used to artificially attract or shift profits that are not proportionate to the economic activity undertaken in the UAE by setting up the criteria that confirm that the UAE entities is carrying out an activity in the UAE that has economic substance.

On 30 April 2019, the UAE introduced the Economic Substance Regulations or the “ESR” through the Cabinet of Ministers Resolution No. 31 of 2019 which was then repealed and replaced on 10 August 2020 by the Cabinet of Ministers Resolution No. 57 of 2020.

Scope of the Regulations

The Amended Regulations apply to a juridical person (incorporated inside or outside of UAE) or an unincorporated partnership registered in the State, including a Free Zone and a Financial Free Zone that carries on a Relevant Activity (hereafter: “Licensee”) listed below.:

  • Banking Business
  • Insurance Business
  • Investment Fund Management Business
  • Lease-Finance Business
  • Shipping Business
  • Holding Company Business
  • Intellectual Property Business
  • Headquarter Business
  • Distribution and Service Centre Business

The Amended Regulations, thus, applies to a limited liability company, a private shareholding company, a public shareholding company, a joint venture company, a partnership (a limited liability partnership, a limited partnership, a general partnership, etc.), but does not apply to a natural person, sole proprietorship, trust, and foundation, that were covered in the Erstwhile Regulations.

The Amended Regulations applies not only to UAE entities that are part of a foreign multinational group, or that are owned by a foreign shareholder but to any UAE entity which carries on a Relevant Activity, regardless of whether the UAE entity belongs to a foreign multinational group.

A “substance over form” approach is used to determine whether a Licensee undertakes a Relevant Activity and is within the scope of the Regulations. This means looking beyond what is stated on its commercial license to the activities actually undertaken by the Licensee.

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

Declarations must be submitted within 12 months from the end of the relevant financial year. For Licensees with a financial year ending on December 31, 2019, a declaration must be made by December 31, 2020.

Exemption from the Regulations

The following Exempted Licensees are exempt from filing an Economic Substance Report and the requirement to demonstrate substance in the UAE:

  1. A Licensee that is tax resident outside the UAE;
  2. An Investment fund and its underlying SPVs / investment holding entities;
  3. A wholly UAE resident-owned business that is not part of a multinational group and that only carries on business in the UAE;
  4. A branch of a foreign entity that is subject to tax on all of its Relevant Income in a foreign jurisdiction.

What is a Licensee?

A Licensee is a juridical person or an unincorporated partnership that is registered in the UAE and that undertakes a Relevant Activity.

By way of example, a Licensee can be:

  1. A limited liability company
  2. A private shareholding company
  3. A public shareholding company
  4. A joint venture company
  5. A partnership (e.g. a limited liability partnership, a limited partnership, a general partnership, etc.)


  • Failure to submit a Notification: AED 20,000
  • Failure to submit an Economic Substance Report; AED 50,000.
  • Failure to provide accurate or complete information : AED 50,000
  • Failure to fulfil economic substance test : AED 50,000

If failure continues in the second consecutive year, the amount of penalty is increased to an amount of AED 400,000 in the subsequent year.

If you are concerned that the Regulations may apply to you and are unsure of the next steps you should be taking, we would be happy to assist you.