Economic Substance Requirements In UAE

Economic Substance requirement Regulations issued On 30 April 2019, the UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 (concerning economic substance regulations in the UAE, “the Regulations”), requiring all in-scope UAE entities (“Relevant Entities”) that carry on certain activities (“Relevant Activities”) to have demonstrable economic substance in the UAE from 30 April 2019.

Who is subject to the Regulations?

The Regulations apply to all UAE onshore and free zone companies that carry on a “Relevant Activity”. It is yet to be confirmed whether the Regulations will also apply to sole proprietorship and branches, but we expect entities incorporated under offshore (free zone) companies regulations that carry on a “Relevant Activity” to be within the scope of the Regulations. Entities that are directly or indirectly owned by the UAE government (both federal and local) are specifically excluded from the Regulations. On this basis, UAE sovereign investment funds and other UAE government related entities would not need to meet the UAE economic substance requirements. The following are considered as “Relevant Activities” under the Regulations:
● Banking ● Insurance ● Fund management ● Lease-finance ● Headquarters ● Shipping ● Holding company ● Intellectual property (IP) ● Distribution and service centre

Economic Substance Requirement

What are the economic substance requirements?

To satisfy the economic substance requirements in relation to a Relevant Activity, a Relevant Entity must:

● Conduct the relevant “core income generating activities” in the UAE;
● Be “directed and managed” in the UAE; and
● With reference to the level of activities performed in the UAE: ○ Have adequate number of qualified full-time employees in the UAE
○ Incur an adequate amount of operating expenditure in the UAE
○ Have adequate physical assets in the UAE.

A Relevant Entity that only undertakes a Holding Company Business will be subject to less stringent economic substance requirements. Additional requirements apply if a Relevant Entity carries out “high risk IP related activities”. If a Relevant Entity carries out more than one Relevant Activity, the economic substance requirements must be met for each of the Relevant Activities.

Outsourcing to third-party service providers
The Regulations allow a company to outsource some or all of its activity to third-party service providers; however, these service providers must in their own right have adequate presence in the UAE and the company must be able to demonstrate that it has adequate supervision of the outsourced activities. Support from service providers cannot be ‘double counted’ if the services are provided to more than one Relevant Entity.


Non-compliance with the Regulations may lead to fines and sanctions which include:

  • a fine of up to AED 50,000 for failing to meet an economic substance test;
  • a fine of up to AED 300,000 for failing to meet an economic substance test in respect of a financial year after an initial notice of failure;
  • sharing of information regarding the non-compliance with tax authorities in the foreign states where the affected companies are incorporated or in which their parent company, ultimate parent or ultimate beneficial owner are resident; and,
  • suspension, revocation or non-renewal of a licence.
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