UAE: economic substance requirements

UAE: economic substance requirements

20 June 2019 the information that United Arab Emirates (UAE) have adopted economic substance requirements for companies, mostly similar to ones of offshore jurisdictions like British Virgin Islands, Belize, Cayman Islands and others, has been published on official website of Cabinet of Ministers of the UAE.

Economic substance requirements were introduced by Cabinet of Ministers Resolution №31 of 2019 (the Resolution) and are applicable to domestic companies, as well as to Free Zone and Financial Free Zone companies. Only companies which carry out Relevant Activities explicitly stated by the Resolution (they are subdivided into State Core Income Generating Activities) are subject to these requirements.

Relevant Activities and State Core Income Generating Activities

The Resolution numbers the following Relevant Activities and State Core Income Generating Activities, carrying out of which by UAE company causes its obligation to comply with economic substance requirements.

Relevant ActivityState Core Income Generating Activities
Banking Business
  • raising funds, managing risks including credit, currency and interest risk;
  • taking hedging positions;
  • providing loans, credit or other financial services to customers;
  • managing capital and preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business
Insurance Business
  • predicting and calculating risk;
  • insuring or re-insuring against risk and providing Insurance Business services to clients;
  • underwriting insurance and reinsurance
Investment Fund Management Business
  • taking decisions on the holding and selling of investments
  • calculating risk and reserves;
  • taking decisions on currency or interest fluctuations and hedging positions;
  • preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business
Lease-Finance Business
  • agreeing funding terms;
  • identifying and acquiring assets to be leased (in the case of leasing);
  • setting the terms and duration of any financing or leasing;
  • monitoring and revising any agreements;
  • managing any risks
Headquarters business
  • taking relevant management decisions;
  • incurring expenditures on behalf of other group entities;
  • co-ordinating group activities
Shipping Business*
  • managing crew (including hiring, paying and overseeing crew members);
  • overhauling and maintaining ships;
  • overseeing and tracking shipping;
  • determining what goods to order and when to deliver them, organising and overseeing voyages;
Holding Company Business If a company derives income from sources other than dividends and capital gains from its equity interest, the State Core Income-Generating Activities must be those activities associated with the income generated
Intellectual Property (IP**) Business If the company is a high risk*** IP business company:
  • taking strategic decisions and managing the principal risks related to development and subsequent exploitation of the intangible asset generating income;
  • taking the strategic decisions and managing the principal risks relating to acquisition by third parties and subsequent exploitation and protection of the intangible asset;
  • carrying on the ancillary trading activities through which the intangible assets are exploited leading to the generation of income from third parties
Distribution and Service Centre Business****
  • transporting and storing component parts, materials or goods ready for sale;
  • managing inventories;
  • taking orders;
  • providing consulting or other administrative services

* Shipping Business is defined as any of the following activities involving the operation of a ship anywhere in the world other than within the territorial waters of the UAE:

  1. the business of transporting, by sea, persons, animals, goods or mail;
  2. the chartering of ships for the purpose described in paragraph (a);
  3. the sale of travel tickets or equivalent, and ancillary services connected with the operation of a ship;
  4. the use, maintenance or rental of containers, including trailers and other vehicles or equipment for the transport of containers, used for the transport of anything by sea;
  5. the management of the crew of a ship.

** IP is deemed to be any intellectual property right in intangible assets, including but not limited to copyright, patents, trademarks, brand, and technical know-how, from which identifiable income accrues to the business (such income being separately identifiable from any income generated from any tangible asset in which the right subsists).

*** High risk IP business company is those which

  1. did not create the intellectual property in an intellectual property asset which it holds for the purposes of its business,
    • and acquired the IP asset either from a Connected Person or in consideration for funding research and development by another person situated in a country other than UAE;
    • and licences the intellectual property asset to one or more Connected Persons or otherwise generates income from the asset in consequence of activities performed by Foreign Connected Persons.
  2. do not carry out research and development, or branding, marketing and distribution as part of its State Core Income-Generating Activity.

**** Distribution and Service Centre Business means purchasing from a Foreign Connected Person and importing and storing in the UAE component parts or materials for goods; or goods ready for sale, and reselling such component parts, materials or goods outside the UAE; or providing services to Foreign Connected Persons in connection with a business outside the UAE.

Essence of economic substance requirements

The economic substance requirements consist of 6 components:

  1. State Core Income-Generating Activities must be conducted within the UAE.
  2. Management and control of such activities of UAE company must be exercised in the territory of UAE. It means that:
    1. board of directors’ meetings must be held in the UAE at an adequate frequency having regard to the amount of decision-making required at that level;
    2. at such board meetings must be a quorum of directors physically present in the UAE;
    3. the meetings must be recorded in written minutes and signed by the directors attending the meetings;
    4. the minutes of such board meetings must record the making of strategic decisions of the UAE company at the meeting;
    5. the directors of the UAE company must have the necessary knowledge and expertise to discharge the duties of the board;
    6. the minutes of all board meetings and the records of the UAE company must be kept in the UAE;
    7. in case of branch offices and representative offices of foreign companies that do not have a board of directors and are managed by a single manager, such manager must be physically present in the UAE while taking key decisions relating to the management and operation;
    8. if outsourcing of UAE company’s activity takes place, it must be available to demonstrate adequate supervision of the outsourced activity and conduct it in the territory of the UAE. It is considered that the economic substance of outsourcing service providers will not be counted multiple times by multiple UAE companies when evidencing their own substance in the UAE.
  3. Having regard to the Relevant Activity, there must be an adequate number of qualified full-time employees in relation to that activity who are physically present in the UAE (whether or not employed by the Licensee or by another entity and whether on temporary or long-term contracts), or adequate level of expenditure on outsourcing to third party service providers, whose activities, employees, expenditure, and premises are in the UAE; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
  4. There must be an adequate expenditure incurred by company in the UAE, or adequate level of expenditure on outsourcing to third party service providers whose activities, employees, expenditure and premises are in the UAE; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
  5. There must be adequate physical assets in the UAE or adequate level of expenditure on outsourcing to third party service providers in the UAE, for the activities of the UAE company.
  6. If State Core Income-Generating Activity is carried out for UAE company by another entity, UAE company must be able to monitor and control the carrying out of that activity by such other entity.

Apart from the general economic substance requirements, there are simplified economic substance requirements for holding companies which derive income only in a form of dividends and capital gains:

  1. they must comply with the requirement to submit any documents, records or information to the relevant Regulatory Authority in accordance with the applicable legislation;
  2. they must have adequate employees and premises for carrying out holding activity (not necessarily in the territory of the UAE).

Economic substance reporting

Any UAE company must annually submit a notification to the Regulatory Authority providing the following information:

  1. whether a company is carrying out a Relevant Activity or not;
  2. whether all or any part of the company’s income in relation to such activity is subject to tax in foreign jurisdiction or not;
  3. the date of the company’s Financial Year end.

Terms of submission of such notification and the name of Regulatory Authority will be announced additionally.

Besides this, each UAE company must submit economic substance report to the Regulatory Authority in 12 months after company’s Financial Year end. It must include the following information:

  1. the type of Relevant Activity of a company;
  2. the amount and type of income from the Relevant Activity;
  3. the amount and type of expenses and assets in respect of the Relevant Activity;
  4. the location of the place of business and, if applicable, plant, property or equipment used for the Relevant Activity of the company in the territory of the UAE;
  5. the number of full-time employees with qualifications and the number of personnel who are responsible for carrying out the Relevant Activity;
  6. information showing the State Core Income-Generating Activity in respect of the Relevant Activity that is conducted;
  7. a declaration as to whether or not the company complies with economic substance requirements;
  8. in the case of a Relevant Activity being an IP Business, whether it is of high risk status or not; if it is, a company must provide:
    1. an information demonstrating that UAE company exercises a high degree of control over the development, exploitation, maintenance, enhancement and protection of the IP asset by an adequate number of full-time employees, with the necessary qualifications, who permanently reside and perform their activities in the UAE;
    2. business plan showing the reasons for holding the ownership in the IP asset in the UAE;
    3. employee information, including level of experience, type of contracts, qualifications and duration of employment with the company;
    4. evidence that decision making is taking place within the UAE;
  9. where a Relevant Activity is outsourced by UAE company, it must:
    1. carry out Core Income-Generating Activity in the UAE;
    2. have adequate supervision of the Relevant Activity that is being outsourced;
    3. submit to the Regulatory Authority a report containing information in relation to the level of resources employed by the third party service provider to which the Relevant Activity is being outsourced, demonstrating that the service provider’s activities, employees, operating expenditures and premises in the State are adequate.

Liability for non-compliance with economic substance requirements

If UAE Regulatory Authority detects non-compliance with economic substance requirements by any UAE company, it must issue written notice which contains:

  1. the fact of determination that the company does not comply with the economic substance requirements in the particular Financial Year made by Regulatory Authority;
  2. the reasons for such determination;
  3. the amount of administrative penalty imposed on the company itself. In accordance with the Clause 1 of Article 10 of the Resolution such amount may vary from 10 000 to 50 000 UAE dirhams (2 700 – 13 500 USD);
  4. the date of payment of the administrative penalty which must be not earlier than 30 business days after the issue of the notice;
  5. actions that should be taken by the company to eliminate non-compliance with economic substance requirements;
  6. company’s right to appeal the notice.

If UAE company does not eliminate non-compliance with economic substance requirements during the next Financial Year the second notice of non-compliance containing the same information will be issued. In such case the amount of penalty will be from 50 000 to 300 000 UAE dirhams. At the same time, Regulatory Authority may not continue company’s license or may revoke it at its own consent, which also must be reflected in the second notice.

It must be noticed that in case of company’s non-compliance with economic substance requirements the Regulatory Authority is obliged to inform competent authority of foreign jurisdiction of such non-compliance’s determination. This data must be transferred in the framework of international exchange of information in accordance with UAE international treaties and agreements to the jurisdiction of tax residency of parent company or beneficial owner of the UAE company.

In addition to this, failure to provide information or deliberate provision of inaccurate information necessary for economic substance reporting may lead to penalty in the amount from 10 000 to 50 000 UAE dirhams. It is also imposed on company itself.

The period of imposition of penalty for non-compliance with economic substance requirements is 6 years beginning with the date on which the company became liable to the penalty. The period of imposition of penalty for failureto provide information or deliberate provision of inaccurate information is 12 months beginning with the date on which the inaccuracy first came into attention of the Regulatory Authority.


The Resolution came into force on 30 April 2019 and it is applicable as to domestic UAE companies, so to Free Zone companies fully. The most probable reason for its adoption and following the trend of economic substance rules implementation which has been set by offshore jurisdictions, is the inclusion of UAE into the EU list of non-cooperative jurisdictions on 12 March 2019. Basically, UAE economic substance is identical to those of British Virgin Islands, of Cayman Islands and of other offshores.

Due to the fact that the Resolution has been adopted in considerably short terms, it leaves some gaps in regulation of economic substance. In particular, the separate terms of some new rules application to companies incorporated before or after the date of adoption of the Resolution have not been established. Also, the Regulatory Authority responsible for monitoring and control in sphere of economic substance of the UAE has not been named yet. All the matters that have not been regulated yet will be subject to additional clarification by UAE Cabinet of Ministers.

Click to rate this page!
[Total: 1 Average: 5]

Share this


Still have questions? Contact us today

Scroll to Top

Book a Free Consultation

The purpose of the initial consultation is to introduce you to our services, as well as to discuss your individual needs related to company registration (maintenance) and opening a bank account.