UAE Economic Substance Regulations update

UAE Economic Substance Regulations update

- James Elliot-Square

The anticipated deadline of 31st March 2020 for notification under the Economic Substance Regulations (“ESR”) is fast approaching. Businesses should understand how the ESR will affect them and consider whether they will need to take steps to demonstrate compliance with the new regulations.

Since the introduction of the ESR in 2019 (Click here to see our previous article on ESR), the UAE Ministry of Finance has released several guidance notes (click here) and published FAQs to clarify aspects of the regulations. While these guidance notes and FAQs go some way towards helping companies understand the scope of the ESR, further guidance is expected to clarify how the ESR will apply. In the meantime, the key aspects of the MOF guidance notes and FAQs are as follows:

  • The ESR apply to any juridical or natural person registered under UAE law (including all free zones) to carry out a business licensed by an authority in the UAE including an LLC, Branch, Representative Office, partnership or sole proprietorship.
  • The authority issuing the “licence” of an entity is the “Relevant Authority” for the purposes of notification and reporting under the ESR
  • While an entity may fall within the scope of the ESR, it may not be required to demonstrate compliance with the ESR. For example, the ESR will only apply to an entity deriving an income from a “Relevant Activity” in the UAE.
  • The ESR will not apply to:
    a) an entity that does not carry on a Relevant Activity; or
    b) an entity in which the Federal or State government of the UAE has a direct or indirect share interest.
  • In determining whether an entity is conducting a “relevant activity”, regard must be had to the actual activities of the company which may be different from or additional to the activities stated on the entity’s licence.
  • It is a requirement of the ESR that an entity be ‘directed and managed” in the UAE. An entity can satisfy this requirement by holding at least one meeting in the UAE per financial year with a quorum of directors or the manager (as the case may be for an individually managed entity) physically present.
  • The ESR requires that an “adequate” level of core income generating activities (CIGA) take place in the UAE. An entity may outsource CIGA to a related party in the UAE. However, the entity has an obligation to demonstrate that outsourcing CIGA third-party or related-party service providers is not being done to circumvent compliance with the ESR.
  • Holding companies whose activities are limited to holding equity participation are not required to demonstrate that they carry out CIGA in the UAE. However, holding companies that undertake a relevant activity in addition to solely receiving income from equity interests (i.e., dividends and capital gains) must meet the full ESR requirements.


Despite the clarifications above, there are still some uncertainties. For example, it remains unclear how the Relevant Authority will interpret “adequate” and “appropriate” which are threshold tests for compliance with the ESR. The guidance notes provide that adequate or appropriate for each licensee depends on the nature and level of the relevant activities. Nevertheless, given the vagueness of these terms, we recommend that companies maintain sufficient records of resources used and expenditures incurred inside the UAE to ensure that they are able to demonstrate “adequacy” and “appropriateness”.

In addition, there is no guidance on the meaning of ‘key decisions’ as it applies to the requirement for a manager, in the instance of an individually managed company, to ensure that they are physically present in the UAE when taking “key decisions” relating to the management of the company. Until further guidance is received, we recommend that companies maintain accurate records and minutes of all decisions taken by the manager in relation to the business in order to satisfy this requirement.

What can you do to prepare for the Economic Substance Regulations deadline?

While the precise date for notification is uncertain and the designated relevant authorities have yet to communicate procedural requirements and templates for notification, we expect minimum notification requirements will consist of:

  • Whether or not the entity carries out a relevant activity or several relevant activities;
  • Whether or not gross income is subject to tax outside the UAE; and
  • The date of the entity’s financial year-end.

We recommend that businesses in the UAE review the ESR and associated guidance notes to determine whether they are required to meet the economic substance test. If so, then the business will need to consider how they can demonstrate compliance with the ESR in preparation of submitting a report to the relevant authority.

Reviewing corporate governance structures, assessing what CIGA is undertaken in the UAE and reviewing outsourcing arrangements are all recommended steps to prepare the business for compliance with the ESR.

How can PRO Partner Group help?

PRO Partner Group is the leading company formation support specialist in Abu Dhabi and Dubai. We specialise in setting up and supporting foreign businesses in the UAE providing secure Local Partner, National Agent and PRO services - establishing companies and assisting in managing their staffing, visas and back office needs and operations.

PRO Partner Group can assist to ensure that your AGM and corporate governance and compliance requirements are in place and further advise on the ESR and notification and reporting requirements as they become clearer.

For more information please contact a member of the team on; telephone our Abu Dhabi office on +971 (0)2 448 5120 or our Dubai on +971 (0)4 456 1761 or complete the contact form below. Alternatively, you can email me directly at or call me on +971 (0)50 494 4709.

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