On 11 September 2019, the UAE issued Ministerial Decision No. 215 of 2019 on the Directives for the implementation of the Economic Substance Regulations (ESR). The ESR was earlier published in April 2019 as the Cabinet of Ministers Resolution No. 31 of 2019.

The Ministerial Decision of September 2019 (the “Guidance”) is served as a ‘preliminary’ advice on how the Economic Substance Test (“EST”), could be met for the purposes of complying, in accordance, with the provisions of the ESR. The Guidance provides various procedures and functions as to how the Regulatory Authorities wish to enforce and asses the test.

The Guidance may be amended from time to time, revised or expanded by the appropriate Regulatory Authorities.


At the outset, the Guidance confirms that the ESR is not applicable towards companies where any of the following governmental bodies have at least 51% direct or indirect ownership in its shareholding. These bodies include:

  • The Federal government, or;
  • Government of any Emirate of the UAE, or;
  • Any governmental authority or body of any of them.

How will the Economic Substance Test be determined?

Each Regulatory Authority will have their own substance and reporting guidelines that the Licensee will need adhere to in order to satisfy the EST as per the ESR. The licensees will need to provide a notification containing the appropriate information for the Relevant Authority to determine if the ECT criteria has been satisfied.

For example, for a company registered in DIFC, it is the DIFC Authority (as Regulatory Authority) who issues the reporting requirements and who needs to receive the notifications for the EST. Likewise, for a company registered for instance in mainland Dubai or in DMCC, it will be the Dubai Department of Economic Development, respectively the DMCC Authority (as Regulatory Authorities) that will issue requirements and receive notifications from the companies registered under them. As such, it is the Regulatory Authorities that determine in each case whether the Economic Substance Test (EST) is met.

As a first clarification, the ECT requirements apply only to specific areas of business, which are: Banking, Insurance, Investment Fund Management, Lease-Finance, Shipping, Headquarters Business, Holding Companies, Intellectual Property, Distribution and Service Center Businesses. In the conditions set forth by the ESR, such businesses are considered to undertake income-generating Relevant Activities, therefore their activities need to be notified to the Regulatory Authority.

Secondly, the Guidance mentions that the Regulatory Authority will collect information from the Licensee in two ways:

  • By way of self-reporting; and
  • Pursuant to specific requirements made by the Regulatory Authority.

The manner as to how these forms are to be written and laid out is yet to be given. However, it would seem to be determined as per each Regulatory Authority.

Thirdly, the information that needs to be supplied to the Regulatory Authority generally refers to:

  • Whether a Licensee (company) carries out Relevant Activity; and
  • Whether or not all or any part of the Licensee’s gross income in relation to a Relevant Activity is subject to tax in a jurisdiction outside of the UAE;
  • The date of the end of that Licensee’s Financial Year;
  • Information referring to the relevant income and operational expenses of the company, its employees, management, board meetings, intellectual property assets and activities, location and place of business, outsourced business, as determined in detail by Article 8(4) of the ESR. The Regulatory Authorities may require additional documents, in order to evaluate whether a company and its activities meet the EST.

Time Frame

The requirements above are in effect from 1 January 2020, meaning that all licensees commenced on or after 1 January 2019 and carrying a Relevant Activitywill need to submit an annual notification concerning these requirements at the end of their Financial year, which would be (12) months from the date of commencement.

In the opinion of certain Regulatory Authorities in UAE, the end of March 2020 would be the first reporting deadline. In this time frame, a simplified form of reporting will be required, followed by a more comprehensive report to be notified to the Regulatory Authorities by December 31 2020. The Regulatory Authorities are expected to issue guidance to their licensees in the close future.

Article 4.2.3 of the Guidance has clarified that it is not mandatory for the Regulatory Authority to issue their decision of whether the Licensee has met the prescribed EST requirements at the end of the relevant financial year instantly. However, if a decision needs to take place, then as per the ESR, the decision should be executed no later than six (6) years after the end of that relevant financial year. However, this time period will not be applicable if the Regulatory Authority cannot reach a decision due to the Licensee’s or any other person’s action, deemed as gross negligence, fraud or misrepresentation.

The ESR doesn’t set out a time frame regarding the retention of records. In this respect, the Guidance advises that a Licensee should retain any relevant information evidencing compliance with the ESR for a period of six (6) years after the end of each relevant financial year. Therefore, upon questioning from the Regulatory Authority, the licensee may be able to address those requests.

Key factors concerning the Economic substance test

To get the full transparency as to what comprises the EST, the Guidance has provided additional clarity regarding the information below, as to how the Regulatory Authority would assess the submission. This involves:

  • The Licensee portraying that their activities have adequate substance. The ESR has pointed out what activities are considered ‘Core Activities’, under Article 5 ESR. However, the guidance mentions that this not an exhaustive list. Meaning, the licensee may use that list, but are not limited towards them. Therefore, a Licensee should analyze the nature of their Relevant Activity(ies), rather than focusing only on Core Income- Generating Activities (“CIGA”)  list under the ESR.
  • The Licensee to show whether their entity has satisfied the ‘directed and managed’ test appropriately, by elaborating that at least one (1) meeting should be held per financial year which should be signed by all attendees physically present in the UAE. Furthermore, the applicable law under which that entity is governed by should be considered regarding meeting requirements.
  • The Licensee showing that their Relevant Activity is engaging in a ‘genuine business activity’, whilst carrying out the relevant CIGA in the UAE with the employees, expenditure and premises. The guidance mentions that the EST has no intention to compare a smaller firm’s requirements to the same level of a medium-large firm. Each EST will be individually assessed as per the firm’s nature and level of the relevant activity, income earned and the firm’s size.
  • The Licensee proving that outsourcing to third-party service providers is not being undertaken with the intention of trying to evade compliance with the EST if brought up. Furthermore, within an agreement between the Licensee and the outsourced, the Licensee should consider mentioning ECR compliance terms, such as disclosing information to the Regulatory Authority, for conformity purposes. The Guidance also notes that double counting is not allowed if the services are provided to more than one Licensee carrying out a Relevant Activity in the UAE.

Additional Guidance for Holding Companies and Intellectual Property Business

As per the Guidance, a holding company business that derives its income from dividends and capital gains only are subjected to a reduced ECT. However, a Licensee that owns other forms of assets besides dividends and capital gains (e.g. bonds, government securities, interest in real property) will not be deemed as a ‘pure equity holding entity’, (even if it also owns equity participation). Therefore, the entity will not be treated as carrying on holding business and therefore will not be exempted from the EST requirements.

The Guidance mentions that income which is derived from Intellectual Property “IP” assets, pose a greater risk due to artificial profit shifting. Similarly, the ESR notes that certain activities relating to IP Business are to be considered as ‘High Risk’, therefore, more conditions are needed to be satisfied by a Licensee undertaking these activities as mentioned under Article 5(8)(e) ESR. The Guidance further mentions that periodic decisions made by non-resident directors or board members would not qualify to satisfy the EST due to considered high risk IP Licensee.

Why is the EST a necessity and how do the Regulatory Bodies use the information provided by companies?

The ESR are issued pursuant to certain international standards set by OECD and the EU, aimed at curbing harmful tax practices.

The information collected by the Regulatory Authorities will be supplied to the Ministry of Finance and, for the companies that do not meet the EST requirements, such information will be notified to the Regulatory Body of each company at issue. Similarly, for companies that do not meet the EST or are High Risk IP businesses, the Ministry of Finance will disclose such information overseas, to Foreign Competent Authorities.

Finally, the Regulatory Authorities may impose administrative penalties for licensees who fail to notify their activities or do not otherwise comply with the ESR and the Regulatory Authorities rules in this respect. Conversely, the licensees will have the right to appeal the Regulatory Authority decisions.


The UAE entities will need to analyze carefully whether their business is in line with the ESR. The Regulatory Authority will adopt a “strict yet pragmatic approach” when assessing the SCT.  The Guidance acts as a supporting guide towards the regulations by providing further insight as to what is required. However, further guidance is expected to be issued for further support and this is expected from the Regulatory Authorities in the close future.

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Assistant Author/Researcher: Ifrah George

Dr. Laura Voda

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