Economic Substance Filing

On 30 April 2019, the UAE introduced the Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the “ESR”). On 10 August 2020, amendments were introduced to Resolution 31 by the Cabinet of Ministers by way of Cabinet of Ministers Resolution No. 57 of 2020, which repealed and replaced Cabinet of Ministers Resolution No. 31 of 2019.

The ESR was introduced as part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation.

The ESR applies to Licensees (i.e. legal persons and unincorporated partnerships registered by a competent authority in the UAE and that carries out a “Relevant Activity”) across the UAE, including Free Zones and Financial Free Zones, and requires Licensees that carry on a Relevant Activity and derive income from such Relevant Activity to meet the Economic Substance Test (as defined in the ESR).

United Arab Emirates Economic Substance Regime

The Federal Economic Substance Regime consists of:

Cabinet of Ministers Resolution No. (57) of 2020 concerning Economic Substance Requirements , and ESR Guidance and Relevant Activities Guide - Ministerial Decision No. 100 of 2020 .

Scope of Application in ADAFZ

ESR requires ADAFZ Licensees that carry on one or more "Relevant Activities" to have economic substance in the UAE in relation to those activities. Relevant Activities are defined in the ESR as:

Banking business,
Insurance business,
Investment Fund Management business,
Lease-Finance business,
Headquarter business,
Shipping business,
Holding Company business,
Intellectual Property business, and
Distribution and Service Centre business.

Please refer to Schedule 1 of Ministerial Decision 100 for an explanation and examples of each activity.

In ADAFZ, Licensees and Exempted Licensees may include companies, partnerships or branches of foreign companies, that are registered in ADAFZ for financial years commencing on or after 1 January 2019.

The ESR requires ADAFZ Licensees that carry on one or more “Relevant Activities” and earn income from such activities to have economic substance in the UAE in relation to these activities.

Economic Substance Requirements

Notification

All ADAFZ Licensees and Exempted Licensees that carry on one or more "Relevant Activities" are required to file a Notification annually, within 6 months of the end of the financial year of the entity.

Report

ADAFZ Licensees (not Exempted Licensees) that undertake a Relevant Activity from which they earn income during a relevant Financial Year, are required to:

Meet the Economic Substance Test; and
File an Economic Substance Report .