Economic Substance Regulations

The UAE Cabinet has issued Ministerial Resolution No.31 of 2019, requiring all in-scope UAE entities which conduct certain activities (Relevant Activities) to have demonstrable economic substance in the UAE.

As a result of the promulgation of the Resolution, the UAE was removed from the European Union’s blacklist by the Code of Conduct Group on Business Taxation.

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):

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

Requirements to meet Economic Substance Test

A company meets the Economic Substance Test in relation to a Relevant Activity in the following cases:

  1. It is directed and managed in the UAE in relation to the activity
  2. Conduct core income-generating activities in the UAE
  3. Have an adequate number of qualified full-time employees in the UAE
  4. Incur an adequate amount of operating expenditure in the UAE
  5. Hold adequate physical assets in the UAE

There is an exemption for the companies that come under the ownership of the government, directly or indirectly.

A relevant entity must report certain information regarding its relevant activities to the regulatory authority concerned (the one that issued the trade license to the entity), annually.

If an entity fails to meet the requirements or if inaccurate information is given to the regulatory authority, annual administrative penalties of AED 10,000 to AED 300,000 will apply.

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 Ultimate Beneficial Owners are residents.