UAE: Ministry of Finance amends Economic Substance Regulations and Guidance

In brief

On 10 August 2020 the UAE Cabinet of Ministers issued Cabinet Resolution No. 57 of 2020 which repeals and replaces Cabinet Resolution No.31 of 2019. The amended ES Regulations apply from 1 January 2019 and introduce important changes to the scope and application of the UAE economic substance regime. The UAE Minister of Finance also issued updated guidance on 19 August 2020, clarifying certain aspects of the amended ES Regulations.

In detail


The UAE introduced economic substance requirements for certain businesses on 30 April 2019 by way of Cabinet of Ministers Resolution No.31 of 2019 concerning Economic Substance Regulations (“the original ES Regulations”). Guidance on the application of the original ES Regulations was issued on 11 September 2019 pursuant to Ministerial Decision No. 215 of 2019 (“Guidance”). On 10 August 2020, the UAE Cabinet of Ministers issued Cabinet Resolution No. 57 of 2020 (the “amended ES Regulations”) which repeals and replaces the original ES Regulations, along with updated Guidance clarifying the amended ES Regulations (Ministerial Decision 100 of 2020 dated 19 August 2020). In addition, the UAE MoF has updated the information on its dedicated economic substance website (link here). The amended ES Regulations apply from 1 January 2019 and introduce important changes to the scope and administration of the economic substance regime in the UAE, which are discussed below. 

Critical changes in the amended ES Regulations

The amended ES Regulations introduce a number of important changes: Definition of a “Licensee”

  • The amended ES Regulations only apply to (i) juridical persons (persons with separate legal personality) and (ii) unincorporated partnerships that carry on a relevant activity in the UAE. 

  • Natural persons, sole proprietors, trusts and foundations (that were considered as “Licensees” under the original ES Regulations) are no longer in scope of the ES regulations, and therefore do not need to file a notification or meet the Economic Substance Test.

  • The amended ES Regulations also clarify the treatment of UAE and foreign branches (see page 4). 

Applicable exemptions

  • The amended ES Regulations introduce the following exemptions:

  1. Entities that are tax resident outside the UAE

  2. Investment Funds

  3. Entities that are wholly owned by UAE residents and that (i) are not part of a multinational group, and (ii) only carry out business activities in the UAE

  4. UAE branches of a foreign head office / parent whose relevant income is subject to tax in the jurisdiction of the foreign head office / parent

Exempt entities must (i) file a notification and (ii) provide sufficient documentary evidence to substantiate and benefit from their exempt status. Ad 1) The UAE entity will need to submit a tax residence certificate or other documentation issued by the tax authority in the foreign jurisdiction in which it claims to be a tax resident, evidencing that it is treated as a locally tax resident entity in that foreign jurisdiction. Ad 2) The Investment Fund exemption applies to the Investment Fund as well as any UAE entities used by the Investment Fund to make or hold investments, but does not extend to the entity(ies) in which the Investment Fund ultimately invests.  Ad 3) The term UAE residents refers to either (i) UAE citizens or (ii) individuals holding a UAE residency visa who reside in the UAE. Ad 4) Subject to further guidance, we would expect that the “subject to tax” test is met where the income of the UAE branch is included in the taxable income of the foreign head office / parent, irrespective of whether the foreign head office / parent can claim a branch profit exemption under a double tax treaty with the UAE or under the domestic tax law of the jurisdiction of the foreign head office / parent.  

  • Entities directly or indirectly owned at least 51% by the UAE government are no longer specifically exempted under the amended ES Regulations. Such entities may (where applicable), however, benefit from any of the newly introduced exemptions set out above.

Changes to the definition of certain “Relevant Activities”

Distribution and Service Centre Business

  • The scope of the “Distribution and Service Centre Business” has been expanded such that:

  • There is no longer a requirement for the goods to be imported and stored in the UAE for an entity to be considered a “Distribution and Service Centre Business”.

  • There is no longer a requirement for services to be provided “in connection with a business outside the State”, resulting in any service provided to a foreign related party to be considered a “Distribution and Service Centre Business”.

High Risk Intellectual Property Licensee

  • The definition of a High Risk Intellectual Property Licensee has been limited to an intellectual property businesses that meets all of the following conditions:

  1. The business did not create the intellectual property asset.

  2. The business acquired the intellectual property asset from either:

  3. a Connected Person, or

  4. in consideration for funding research and development by another person situated in a foreign jurisdiction; and

  1. The business licenses or has sold the intellectual property asset to a Connected Person, or earns separately identifiable income from a Foreign Connected Person in respect of the use or exploitation of the intellectual property asset.

Changes to the definition of a “Connected Person” and introduction of a definition of a “Group”

  • The amended ES Regulations define a Connected Person as an entity that is a part of the same Group as the Licensee or the Exempted Licensee. 

  • A Group is defined as “two or more entities related through ownership or control such that they are required to prepare consolidated financial statements for financial reporting purposes under the accounting standards applicable thereto”.


  • The UAE Federal Tax Authority has been appointed as the Assessing Authority for the ES Regulations. In this capacity, the FTA will be responsible for assessing and enforcing compliance of UAE businesses with the Economic Substance Test.

  • The Regulatory Authorities’ primary responsibility is the collection and verification of information regarding their Licensees, and assisting the FTA in carrying out its role as National Assessing Authority. 

Exchange of information

  • The amended ES Regulations provide that the Ministry of Finance (as Competent Authority) will exchange information with Foreign Competent Authorities on Licensee that claim to be exempt from the ES Regulations on the basis of: 

  • being tax resident outside the UAE; or

  • being a UAE branch of a foreign entity whose income is subject to tax outside of the UAE.

Critical areas clarified in the updated guidance

The updated Guidance provides further clarifications on the application of the amended ES Regulations. Included below is a summary of critical clarifications that were not addressed in the previous guidance and/or Relevant Activities Guide.

Treatment of branches

  • As branches do not have separate legal personalities from their “parent” or “head office”, they are not regarded as “Licensees”. 

  • The Guidance clarifies how branches and their “parent” or “head office” are required to comply with the ES Regulations:

  • UAE branch of a UAE business: The UAE business must file a single notification and (if applicable) an Economic Substance Report to report the relevant activities of itself and all its UAE branches.

  • UAE branches of a foreign business: The UAE branch is not subject to the ES Regulations if its relevant income is reported in the tax return of the foreign parent / head office.

  • Foreign branch of a UAE business: The UAE business does not need to report (and demonstrate economic substance in the UAE related to) the relevant activities of its foreign branch, provided that the foreign branch is subject to tax on its relevant income in the foreign jurisdiction.

Notification filings

  • The amended ES Regulations confirm that notifications must be filed electronically on the Ministry of Finance Portal within six months of the Licensees financial year end. 

  • Similarly, businesses that already submitted a notification to their Regulatory Authorities will be required to re-submit their notification on the Ministry of Finance portal after it goes live. The guidance does not confirm a deadline for this resubmission. 

  • For businesses that are required to file a notification before the portal is available it may be reasonable to anticipate that the deadline for such filings is postponed until the portal goes live. 

Other clarifications

  • Gross income means all income from whatever source derived, without deducting any type of costs or expenditure.

  • A Licensee is not required to perform all the Core Income Generating Activities (“CIGAs”) listed in the ES regulations for a particular relevant activity. However, any of the CIGAs that generate relevant income must be performed in the UAE.

  • The board members (or equivalent) are not required to be resident in the UAE. However, the board members (or equivalent) are required to be physically present in the UAE when taking strategic decisions.

  • A Licensee may outsource activities which are not CIGAs to parties outside the UAE, such as back office functions, IT, payroll, legal services, or other expert professional advice or specialist services provided.

Key takeaway

The amended ES Regulations and Guidance provide welcome changes and some additional clarity with respect to the scope and application of the economic substance requirements in the UAE.  The changes to the definition of “Licensee”, the introduction of some additional categories of exempted Licensees, and the clarifications regarding the treatment of branches should help reduce the overall burden on businesses in the UAE. All UAE entities are strongly recommended to assess or reassess whether and which of their activities fall within the scope of the Economic Substance Regulations, and how to ensure they can meet the Economic Substance Test in respect of each relevant activity. This is both a qualitative and quantitative assessment that would involve consideration of operational, financial, tax / transfer pricing, legal and governance matters.

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