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UAE Economic Substance Regulations

July 29,2019 / Haroon Juma / Accounting Blogs

Getting ready for the UAE Economic Substance Regulations

The United Arab Emirates (UAE) Government has taken a progressive step in its commitment to comply with international good governance standards by ratifying Resolution No.31 of 2019, concerning Economic Substance Regulations in the UAE, “the Regulations” on April 30, 2019.

The UAE Economic Substance (ES) rules have been designed to follow the guidance issued by the European Union (EU) and Organisation for Economic Co-operation and Development (OECD).

The economic substance rule comprises of three (3) key areas of tests that all companies who are commencing relevant activities in the country must undertake and pass to demonstrate its economic substance:

1) Direct and Manage

2) Core Income Generating Activities (CIGA)

3) Adequate

Below are the guidelines for entities that operates “Relevant Activities”.

1. Directed and Managed

The directing and managing of the relevant activity of the entity should be within the UAE. The requirement may be, but not limited to a certain number of directors being physically present in the country, board meeting in the country making of strategic decisions and records of written minutes signed by the directors attending the meetings.

For entities where there are no board of directors, the rules have indicated that the manager should be physically present in the country when taking key decision relating to the management and operation of the business.

The regulation also allows entities to outsource a Relevant Activity to third party service providers, provided that they are able to:

1) Demonstrate adequate supervision of the outsourced activity,

2) Conduct the service within the country

3) The economic substance of service providers will not be counted multiple times by multiple Licensees when evidencing their own substance in the State.


  1. Decision maker (Directors and/or Managers) should be physically present in the UAE when taking strategic decisions for the company.
  2. Services from a third-party provider are allowed in case of no Directors or Managers.

2. Core Income Generating Activities (CIGA)

The Economic Substance Regulations have stated that the entity who carry out relevant activities should be able to prove that the relevant CIGAS has been commenced in the UAE.

Each relevant activity has its own criteria for the CIGA test. The list below shows samples of core generating income activities conducted in the UAE for each relative activity that needs to comply with the Economic Substance rules.

Banking Businesses

  • Raising funds, managing risk including credit, currency and interest risk.
  • taking hedging positions
  • Providing loans, credit or other financial services to customers
  • Managing capital and preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business

 Insurance Businesses

  • Predicting and calculating risk
  • Insuring or re-insuring against risk and providing Insurance Business services to clients
  • Underwriting insurance and reinsurance

 Fund Management Businesses

  • Taking decisions on the holding and selling of investments
  • Calculating risk and reserves
  • Taking decisions on currency or interest fluctuations and hedging positions
  • Preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business

Lease-Finance Business

  • Agreeing funding terms
  • Identifying and acquiring assets to be leased (in the case of leasing)
  • Setting the terms and duration of any financing or leasing
  • Monitoring and revising any agreements
  • Managing any risks

Headquarters Businesses

  • Taking relevant management decisions.
  • Incurring operating expenditures on behalf of group entities.
  • Coordinating group activities.

Shipping Businesses

  • Managing crew (including hiring, paying and overseeing crew members)
  • Overhauling and maintaining ships
  • Overseeing and tracking shipping
  • Determining what goods to order and when to deliver them, organising and overseeing voyages

Holding Company Businesses

  • All activities related to that business; and in respect of Holding Company Business that derives income from other sources other than dividends and capital gains from its equity interest, the state Core Income-Generating Activities shall be those activities associated with the income generated.

 Intellectual Property

  • Where the Intellectual Property Asset is a
  • (1) patent or an asset that is similar to a patent, research and development.
  • (2) non-trade intangible (including a trademark), branding, marketing and distribution.


  • If the Relevant Activity is conducted by a Licensee that is regarded as a High Risk IP Licensee, the State Core Income-Generating Activity must include any of the following additional activities (1) taking strategic decisions and managing (as well as bearing) the principal risks related to development and subsequent exploitation of the intangible asset generating income. (2) taking the strategic decisions and managing (as well as bearing) the principal risks relating to acquisition by third parties and subsequent exploitation and protection of the intangible asset. (3) carrying on the ancillary trading activities through which the intangible assets are exploited leading to the generation of income from third parties

 Distribution & Service Centre Businesses

  • Transporting and storing component parts, materials or goods ready for sale
  • Managing inventories
  • Taking orders
  • Providing consulting or other administrative services


  1.  All Businesses that carry out relative activities should be able to prove that relevant CIGAs has been done in the UAE

2. The ES rule allow the use of third-party provider to satisfy these requirements related to CIGAs with the limitation of (1)not counting the economic substance of service providers multiple times by multiple entities when evidencing their own substance in the UAE and (2)the entity is able to monitor and control the CIGAs.

3. It is important to highlight that for the purpose of the ES rules, the relevant activities of (i) Distribution and Service Centre and (ii) Intellectual Property refer to transactions/charges with foreign related parties only. Therefore, regular commercial business for such activities with non-related parties would not be covered by the new rules.

4. The ES rules are subject to relevant activities:

     (1) Distribution and Service Centre 

(2) Intellectual Property with foreign transactions only.

5. Pure Holding Companies that earning solely from dividends and capital gains income are subject to a lighter economic substance scrutiny on the basis that a reduced test is applied. Otherwise, ES test will be applicable for the additional activities.

3.  Adequacy

The ES Regulations states that the entity who carry out “Relevant Activities” must be able to prove that it can satisfy the requirement of the regulations in regards with the following:

  • Board of directors meets in the State in regard to the amount of decision-making required at that level.
  • Qualified full-time employees that are physically present in the UAE
  • Level of expenditure on outsourcing to third party service providers. Third party services should be physical present in the UAE
  • Operating expenditure incurred in the State
  • Physical assets in the State


  1. Businesses that carry out “Relevant Activities” must have sufficient resources to operate its CIGAs in the country.
  2. The Economic Substance rules allows businesses to outsource the services from a third-party provider that:

(1) Is physically present in the country;

(2) Business has adequate supervision of the outsourced activity.

What needs to be undertaken?

Clarifications on the procedures, templates and requirements for the reports and notifications has not been provided but is expected to be released soon.

The UAE regulation has also stated the list of offences and penalties for entities who fail to meet the economic substance test.

Businesses must submit its annual report that proves its compliance with the economic substance test to the Regulatory Activity within 12 months after the end of the financial year.

Failure to comply with the Economic Substance test will be subjected to AED50,000 up to AED300,000.

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