The Regulations apply to all licensed businesses in the UAE, whether they are registered onshore or in a Free Zone

In 2019, Economic Substance Regulations (Regulations) were introduced in the UAE that place on obligation on UAE businesses to demonstrate that they have adequate operational and financial connections with the UAE.  This follows the introduction of similar legislation around the world, including other popular offshore jurisdictions, in order to ensure compliance with international initiatives to combat harmful tax practices.

The Regulations apply to all licensed businesses in the UAE, whether they are registered onshore or in a Free Zone (except businesses which are owned, directly or indirectly, by the UAE Government or any Government authority or body).

In this Client Alert, we provide an overview of the Regulations and the process for meeting the annual notification requirements.  It is important to note that the deadline for onshore businesses to file an Economic Substance Notification (Notification) with their Regulatory Authority is 30 June 2020. 


The Regulatory Authority for most businesses will be the Ministry of Economy, although businesses carrying on a Relevant Activity (see below) may also need to report to the UAE Central Bank, Insurance Authority or Securities and Commodities Authority depending upon the nature of their business.

The Notification form is submitted through the Ministry of Economy’s on-line ESR portal which can be found at  The Notification will include initial information about the licensee and the activities it carried on during the financial year ended 31 December 2019 (Reporting Period), and whether or not it carries on a Relevant Activity.  If it does carry on a Relevant Activity a further notification must be made to demonstrate that it has economic substance (see below). 

Economic Substance

To determine if a business has economic substance the Economic Substance Test is applied.  This test measures whether, during the Reporting Period, the business generated core income through the licensed activities it carries on in the UAE, is managed from within the UAE, has an adequate number of employees, incurs adequate expenses and has adequate tangible assets. 

What is a Relevant Activity?

A business carrying on any of the following activities (Relevant Activity) will be required to demonstrate, through the application of the Economic Substance Test, that it carries on a substantive economic activity in the UAE.  

Banking Headquarters Intellectual property holding
Finance and leasing Holding company Shipping
Fund management Insurance company Distribution and service centre

The Regulations adopt a ‘substance over form’ approach so your licence does not need to accurately reflect these categories for it to be carrying on a Relevant Activity in accordance with the Regulations.  If you are unsure whether your business carries on a Relevant Activity, professional advice should be obtained as there are consequences for non-compliance with the Regulations.

Annual Report

If deemed to be carrying on a Relevant Activity, the licensee must also submit an Annual Report within 12 months of the end of its financial year to substantiate the existence of economic activities required to meet the Economic Substance Test.  We are currently awaiting guidance on the format of this Annual Report, but understand that this will need to be filed by the end of 2020.


Failure to comply with the Regulations including failure to notify by the deadline of 30 June 2020, providing false information, failing to submit the Annual Report within the required timeframe and/or failure to meet the Economic Substance Test if carrying on a Relevant Activity, carries penalties of up to AED 300,000.  It is therefore critical that all UAE companies obtain professional advice to ensure their full and timely compliance with the Regulations.

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