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Economic Substance Regulations

Expert solutions to ensure your business meets UAE Economic Substance Regulations, staying compliant and avoiding potential penalties.

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Economic Substance Regulations

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Economic Substance Regulations

Economic Substance requirements were introduced by the UAE Ministry of Finance through Cabinet of Ministers Resolution No. 31 of 2019, issued on 30 April 2019 (UAE ESR). This was followed by Ministerial Decision No. 215, which provided directives for implementing the ESR, and Cabinet Resolution No. 58 of 2019, which outlined the Regulatory Authorities responsible for enforcing the UAE ESR. The regulations mandate that all UAE entities engaged in certain activities (known as “Relevant Activities”) must demonstrate economic substance in the UAE, with compliance required from 30 April 2019.

Who Are ‘Relevant Entities’?

A “Relevant Entity” is defined as:

– A juridical person (whether incorporated inside or outside the UAE) or
– An unincorporated partnership

These entities must be registered in the UAE, including in free zones and financial free zones, and must carry out a “Relevant Activity.” Entities are required to apply a ‘substance over form’ approach to determine whether they conduct a Relevant Activity. If they do, they will be considered Licensees for the purposes of the Economic Substance Regulations (ESR), even if the Relevant Activity is not explicitly listed on the entity’s trade license or permit.

Who Is Liable for ESR in the UAE?

The UAE Economic Substance Regulations (ESR) apply to local companies, including those in free zones, that engage in any of the specified “Relevant Activities.”

Core Income Generating Activities (CIGAs)

Article 3 of Cabinet Resolution No. 57 outlines the Core Income Generating Activities (CIGAs), which are the primary activities a business conducts to generate income from its Relevant Activities. These activities must be carried out in the UAE for the entity to demonstrate compliance with the ESR.

Below are examples of CIGAs for each Relevant Activity:

What Are the Relevant Activities?

The following activities are considered “Relevant Activities” under the ESR:

– Banking
– Insurance
– Investment Fund Management
– Lease Financing
– Headquarters
– Shipping
– Holding Companies
– Intellectual Property (IP)
– Distribution and Service Centers

Economic Substance Test

Companies must first notify the relevant regulators whether they engage in any Relevant Activities as defined by the ESR. Following this, they must comply with the Economic Substance Test and submit an ESR report. Entities within the scope of the ESR must implement strategies for annual ESR notifications and reporting, ensuring they meet all compliance requirements. To navigate these regulations effectively, businesses can seek professional guidance from experienced ESR services firms in Dubai, UAE.

Below are the 5 requirements the companies need to have to undergo the UAE Economic Substance Test

  • 1. Conduct Core Income-Generating Activities Within the UAE (CIGA)
  • 2. Direct and Manage Business From Within the UAE
  • 3. Employ Full-time Staff in the UAE
  • 4. Incur Operating Expenditure in the UAE
  • 5. Retain Adequate Physical Assets in the UAE

Reporting requirement for relevant Entities:

Relevant Entity will be required to submit an annual report (within 12 months from financial year-end) on its relevant activities to the relevant regulatory authority containing specified details and also declaration on whether ES test has been satisfied. 

FY end NotificationNotification (on /or before) Report (on /or before)
31 Dec
30 June
31 dec
30 Sep
31 Mar
30 Sep
30 June
31 Dec
30 June

If the company has a licensed activity but does not conduct or generate the CIGA from the relevant activity, ES tests requirement will not be applicable, however it will be required to provide a notification to the regulatory authority as per Article 8(1).

Penalties where the Economic Substance Test is not met

The below table outlines the penalties for a selection of offence/ violations

Type of offence/ violations Administrative penalty
Failure to submit the ESR Report and any relevant information or documentation required to be submitted OR Failure to meet the Economic Substance Test for each year
AED 50,000 (AED 4,00,000 for a repeat offence/ violation in FY immediately following the FY in which the first offence/ violation was committed)
Wilfully furnishing of inaccurate information
AED 50,000
Failure to submit the ESR Notification (or any relevant information or documentation)
AED 20,000

How can Litrix help?

At Litrix, our team of experienced tax experts is here to guide you through every step of your ESR Compliance journey. Whether you need help assessing the applicability of the ESR to your business, filing the necessary notifications and reports, or mitigating the risks of non-compliance, we are ready to assist.

Our team will support you with ESR compliance in the following key areas:

  • ESR Impact Assessment
  • ESR Advisory
  • ESR Notification and Report Filing

Relevant Activities Under the ESR

The UAE Economic Substance Regulations require companies in both onshore and free zones, as well as other UAE business forms, to demonstrate an adequate “economic presence” in the UAE relative to the Relevant Activities they carry out. These Relevant Activities include:

  • Banking Business
  • Insurance Business
  • Investment Fund Management Business
  • Lease Financing Business
  • Headquarters Business
  • Shipping Business
  • Holding Company Business
  • Intellectual Property (IP) Business
  • Distribution and Service Centre Business

Each of these activities is clearly defined under the regulations.

Exemptions

The ESR provisions do not apply to companies where the Federal Government of the UAE, the Government of any Emirate, or any governmental authority holds at least 51% direct or indirect ownership of the company’s share capital.

Compliance Timeline and Penalties

The regulations apply to financial years starting on or after 1 January 2019. Entities subject to the ESR must:

  • Submit a notification to their Regulatory Authority (as defined in Cabinet Decision No (58) of 2019) starting from 1 January 2020.
  • Prepare and submit an economic substance declaration within 12 months from the end of their financial year. For example, entities with a financial year ending on 31 December 2019 must submit their declaration by 31 December 2020.

If a company does not earn income from a Relevant Activity during a financial period, it is not required to meet the economic substance test or file the economic substance declaration for that period.

Failure to comply with the ESR can result in administrative penalties, the spontaneous exchange of information with foreign authorities, and the potential suspension, revocation, or non-renewal of the company’s registration.

At Litrix, our team is here to ensure you remain fully compliant with the ESR regulations, helping you avoid penalties and navigate the requirements smoothly.

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