What is Economic Substance Regulations in UAE – ESR
As part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an
assessment of the UAE’s tax framework by the European Union (“EU”) Code of Conduct Group on Business
Taxation, the UAE introduced a Resolution on the Economic Substance (Cabinet of Ministers Resolution No.31 of
2019, the “Regulations”) on 30 April 2019. Guidance that provides further clarity on the application of the
Regulations was issued on 11 September 2019. The Regulations require UAE onshore and free zone companies
and other UAE business forms that carry out any of the “Relevant Activities” listed below to maintain an adequate
“economic presence” in the UAE relative to the activities they undertake.
• Banking Business
• Insurance Business
• Investment Fund management Business
• Lease – Finance Business
• Headquarters Business
• Shipping Business
• Holding Company Business
• Intellectual property Business (“IP”)
• Distribution and Service Centre Business
Let us answer some common questions on ESR in UAE
1.Why has the UAE introduced Economic Substance Regulations?
The UAE introduced Economic Substance Regulations to honour the UAE’s commitment as a member of the
OECD Inclusive Framework on BEPS, and in response to a review of the UAE tax framework by the EU which
resulted in the UAE being included on the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist).
The issuance of the Economic Substance Regulations on 30 April 2019 (the Regulations), and the subsequent
release of the Guidance on the application of the Regulations on 11 September 2019, was a requirement for the
removal of the UAE from the EU Blacklist on 10 October 2019. The purpose of the Regulations is to ensure that
UAE entities that undertake certain activities (see question 4) are not used to artificially attract profits that are not
commensurate with the economic activity undertaken in the UAE.
2. What is the first reportable Financial Year?
The Regulations apply to financial years starting on or after 1 January 2019. Example
1: A UAE company with 1 January 2019 – 31 December 2019 financial year: First assessable period would be 1
January 2019 – 31 December 2019. Example
2: A UAE company with 1 April 2019 – 31 March 2020 financial year: First assessable period would be 1 April
2019 – 31 March 2020. No need to comply with the Regulations for the period 1 January 2019 – 31 March 2019.
Who are the “Regulatory Authorities”?
The Regulations are administered by the Regulatory Authorities listed in Cabinet Resolution No (58) of 2019
Determining the Regulatory Authorities Concerned with the Business Mentioned in Cabinet Resolution No (31) of
2019 Concerning Economic Substance Regulations (link
4. Who is subject to the Regulations?
The Regulations apply to UAE onshore and free zone companies, branches, partnerships, and other UAE
business forms (referred to as Licensees) that carry out any of the following Relevant Activities.
● Banking Businesses
● Insurance Businesses
● Investment Fund Management Businesses
● Lease-Finance Businesses
● Headquarter Businesses
● Shipping Businesses
● Holding Company Businesses
● Intellectual Property Businesses
● Distribution and Service Centre Businesses
5. What does it mean to be subject to the ESR Regulations?
For each financial period in which a Licensee earns income from a Relevant Activity, it will need to meet an
Economic Substance Test in relation to that activity. The Economic Substance Test requires a Licensee to
● the Licensee and Relevant Activity are being directed and managed in the UAE;
● the relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE; and
● the Licensee has adequate employees, premises and expenditure in the UAE. In addition to an annual
notification requirement, Licensees that undertake and earn income from a Relevant Activity are also required to
file an Economic Substance Return within 12 months from the end of the relevant financial period (see
6.Do the Economic Substance Regulations ( ESR ) only apply to UAE entities that are part of a foreign multinational group, or that are
owned by a foreign shareholder?
No. The Regulations impose economic substance requirements on any UAE entity which carries on a Relevant
Activity, regardless of whether the UAE entity belongs to a foreign multinational group. However, a UAE based
Distribution Business, Service Centre Business, Headquarter Business or High-Risk IP Business would only be
within the scope of the Regulations if the UAE entity transacts with foreign group companies. Distribution, Service
Centre, Headquarter and High-Risk IP activities where transactions between UAE entities are not subject to
economic substance requirements.
7.Is a company registered under an ‘offshore’ free zone company regime subject to the Economic Substance Regulations?
Yes, if the ‘offshore’ company undertakes a Relevant Activity.
8. Do the activities listed on the commercial license determine whether a Licensee undertakes a Relevant Activity?
No. Whilst the commercial license may indeed state the Relevant Activity, a ‘substance over form’ approach must
be 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 the commercial licence to the activities actually
undertaken by the Licensee during a financial period.
9.Who is exempt from the ESR Regulations?
Licensees that are directly or indirectly at least 51% owned by the Federal or an Emirate Government, or a UAE
Government body or authority, are exempt from the Regulations.
10.What if a Licensee does not undertake a Relevant Activity during a financial period?
If a Licensee does not undertake a Relevant Activity during a financial period, it does not need to meet the
Economic Substance Test. The Licensee would not be required to notify (see question 38) its Regulatory
Authority or submit an Economic Substance Return (see question 39) for the relevant financial period.
11.If all income from the Relevant Activity is earned from outside the UAE, is the Licensee exempt from
the ESR Regulations?
No, this Licensee is not exempt from the Regulations. Income from a Relevant Activity for which the Licensee
needs to demonstrate economic substance in the UAE includes all income, including income that is generated by
the Licensee outside of the UAE.
12.What is “adequate” or “appropriate” economic substance?
The UAE acknowledges that businesses vary in size and nature, and what is adequate and appropriate will
depend on the nature and level of activities carried out, and the level of income earned by the Licensee. The
regulations and Guidance therefore do not provide a “minimum” standard for what is considered “adequate” or
“appropriate”. The Regulatory Authorities are expected to take a pragmatic approach when assessing whether a
Licensee has met the Economic Substance Test, recognising that the type and level of activity of a Licensee may
fluctuate during the course of a financial period and from year to year.