The UAE introduced economic substance regulations in 2019 to comply with EU requirements and ensure that UAE entities do not artificially attract profits. The regulations apply to companies engaged in relevant activities like banking, insurance, and intellectual property. To meet the economic substance test, affected companies must conduct core income-generating activities and adequate employment and expenditures in the UAE. Noncompliance can result in fines, though exemptions exist for government-owned entities and those not engaged in relevant activities or earning income in a given period.

1. ECONOMIC SUBSTANCE
REGULATIONS UAE-FAQ
https://hlbhamt.com/

2. Ever since the introduction of economic substance regulations in the UAE, people have
been raising queries about numerous things related to it. Here we have listed below a
set of questions and answers about economic substance regulations in UAE.

3. 1. Why has the UAE introduced Economic Substance Regulations?
The UAE was added to the European Union list of non-cooperative tax jurisdictions by
the European Commission and this was the reason behind the issuance of the
economic substance regulations. Economic Substance regulations are similar to the
economic substance requirements that were recently implemented in jurisdictions that
include the Cayman Islands and Jersey.
The purpose of the Regulations is to ensure that UAE entities that undertake certain
activities does not artificially attract profits.

4. 2. What is the first reportable Financial Year?
The Regulations apply to financial years starting on or after 1 January 2019. For a
UAE entity with 1 January 2019 – 31 December 2019 financial year, the first
assessable period would be the same time period and for an entity with 1 April 2019 –
31 March 2020 financial year, the first assessable period would be 1 April 2019 – 31
March 2020.

5. 3. Who is subject to the Regulations?
Economic substance regulation will be applicable to companies that engage in any of the
below mentioned “Relevant Activities”;
 Banking Businesses
 Insurance Businesses
 Investment Fund Management Businesses
 Lease-Finance Businesses
 Headquarter Businesses
 Shipping Businesses
 Holding Company Businesses
 Intellectual Property Businesses
 Distribution and Service Centre Businesses

6. 4. What are the requirements to meet the economic substance test?
A Licensee meets the Economic Substance Test in relation to a Relevant Activity in the
following cases:
1. If the Licensee conducts State Core Income-Generating Activity in the State.
2. If the Licensee is directed and managed in the State in relation to that activity,
provided the Licensee’s board of directors meets in the State at an adequate
frequency having regard to the amount of decision-making required at that level.

7. 3. Having regard to the level of Relevant Activity, if there is an adequate number of
qualified full-time employees in relation to that activity who are physically present in
the State (whether or not employed by the Licensee or by another entity and whether
on temporary or long-term contracts), or adequate level of expenditure on outsourcing
to third-party service providers, whose activities, employees, expenditure, and premises
are in the State; and these activities, employees, expenditures and premises are
adequate for carrying out the Relevant Activity being outsourced.
4. If there is adequate operating expenditure incurred by it in the State, or adequate
level of expenditure on outsourcing to third-party service providers whose activities,
employees, expenditure and premises are in the State; and these activities, employees,
expenditures and premises are adequate for carrying out the Relevant Activity being
outsourced.

8. 5. If there are adequate physical assets in the State or adequate level of expenditure
on outsourcing to third-party service providers in the State, for the activities of the
Licensee;
6. In the case of State Core, Income-Generating Activity carried out for the relevant
Licensee by another entity, if it is able to monitor and control the carrying out of that
activity by the other entity.

9. 5. Do the Regulations only apply to UAE entities that are part of a foreign
multinational group, or that are owned by a foreign shareholder?
No, Economic substance requirements will be applicable to all entities that engage in
relevant activities irrespective of the fact whether they belong to a foreign
multinational group or not.
In the case of a UAE based Distribution Business, Service Centre Business,
Headquarter Business or High-Risk IP Business, the regulations will be imposed if the
organization transacts with foreign group entities.

10. 6. Are offshore companies subject to economic substance Regulations?
Yes, offshore companies that undertake relevant activities are subject to regulations.
7. Who is exempt from the Regulations?
Licensees that are directly or indirectly at least 51% owned by the Federal or an
Emirate Government, or a UAE Government body or authority need not comply with
the regulations.

11. 8. What if a Licensee does not undertake a Relevant Activity during a financial
period?
Licensees that do not involve in a relevant activity during a financial period do not have
to meet the economic substance test and will be exempted from the process of notifying
the regulatory authority and submitting an economic substance return.
9. What if a Licensee undertakes a Relevant Activity, but does not earn any income
from that activity during a financial period?
In cases like these, the licensee need not file an economic substance return for the
relevant financial period but will have to submit a notification with the regulatory
authority.

12. 10. If all income from the Relevant Activity is earned from outside the UAE, is the
Licensee exempt from the Regulations?
No, the Licensee is not exempt from the Regulations.
11. Will economic substance be assessed on a Licensee by Licensee basis, or can
Licensees that are part of the same group elect to be assessed on a ‘consolidated’
basis?
No, each Licensee must comply with the Regulations and demonstrate economic
substance individually.

13. 12. When is the last date to file ESR notification for mainland companies?
30th June
13. What are the penalties for non-compliance?
Failure to comply with the ESR (including providing inaccurate or incomplete
information) may result in a fine of between AED 10,000 and AED 50,000 in any fiscal
year. The fines increase to between AED 50,000 and AED 300,000 for the subsequent
fiscal year.

14. 15. Should entities in liquidation file ESR notification?
All licensees in liquidation should file a notification.
DIFC has confirmed that organizations operating in the free zone that has been
dissolved, struck-off, or liquidated before the deadline for submission of the
Notification need not file ESR notification.

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