UAE Economic Substance Regulations (ESR)

In alignment with the UAE’s commitment to the OECD Inclusive Framework and in response to the European Union (EU) Code of Conduct Group’s review of its tax policies, the UAE introduced Economic Substance Regulations through Cabinet of Ministers Resolution No. 31 of 2019, issued on 30 April 2019.

Supplementary guidance was released on 11 September 2019 to clarify the implementation of these regulations. The ESR requires UAE mainland and free zone entities conducting specific “Relevant Activities” to demonstrate adequate economic substance in the UAE in proportion to the nature and scale of their operations.

Entities Required to Comply with ESR

The Economic Substance Regulations apply to UAE onshore and free zone companies, including licensees that are part of multinational corporate groups, engaged in any of the following Relevant Activities:

• Banking
• Insurance
• Investment fund management
• Lease-finance
• Headquarters operations
• Shipping
• Holding companies
• Intellectual property (IP) business
• Distribution and service center business

Effective Date and Filing Timeline

The ESR came into effect on 1 January 2019. Entities subject to the regulations must submit the required notifications and reports within 12 months from the end of their financial year.

Exempt Entities

Certain entities are exempt from the ESR requirements, including:

• Companies that are wholly owned by the UAE Federal or Emirate Governments, or any of their authorities or bodies
• Entities where at least 51% of direct or indirect ownership is held by the UAE Government

Compliance Checklist for Licensees

To ensure compliance, licensees and branches should:

1. Determine Applicability – Assess if their business activities fall under the scope of the ESR
2. File Notifications – Submit the necessary notifications within the regulatory deadlines
3. Assess Income Sources – Evaluate income earned from Relevant Activities during the financial period
4. Conduct UAE-Based Board Meetings – Hold and document meetings of directors physically in the UAE
5. Substantiate Economic Presence – Maintain sufficient assets, qualified staff, and operational expenses in the UAE
6. Manage Outsourcing Arrangements – Ensure control and oversight over any outsourced Relevant Activities

Understanding the Economic Substance Test

To satisfy the Economic Substance Test, a licensee must demonstrate:

• The Relevant Activity is directed and managed in the UAE
• Core Income Generating Activities (CIGAs) are performed within the UAE
• Adequate employees, premises, and expenditure exist in the UAE to support the activity

Need Assistance?

If you’re unsure about your obligations under the UAE Economic Substance Regulations, our experienced consultants can help you navigate compliance requirements with confidence. Get in touch with us today for expert support and tailored guidance.