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During the year 2019, the United Arab Emirates (“UAE”) issued Cabinet Decision No. 31 of 2019 concerning Economic Substance Requirements in response to the European Union Code of Conduct Group’s assessment of its tax framework. During the month of August 2020, the UAE replaced the regulations with Cabinet Decision No. 57 of 2020 concerning Economic Substance Requirements and Ministerial Decision No. 100 of 2020 on the Issuance of Directives for the Implementation of Cabinet Decision No. 57 of 2020 (“Regulations”). As a result, the Regulations require certain businesses and companies in the UAE to maintain an adequate economic presence relative to the activities they undertake.

The Regulations also require an assessment be made in order to determine whether an Economic Substance Notification (“Notification”) and/or an Economic Substance Report (“Report”) should be filed for a specified financial year.  

We understand that you may benefit from an assessment of whether you are required to comply with the Regulations and to what extent. Accordingly, we take this opportunity to brief you on the Regulations and highlight legal and practical measures which you may consider.


Which entities in the UAE are required to comply with the Regulations?

The Regulations apply to “Licensees” – legal  persons and unincorporated partnerships that carry out a Relevant Activity and are registered in the UAE including the free zones, the financial free zones, and offshore free zones.

The Regulations would not apply to: a natural person, a sole proprietorship[1], a trust, or a foundation.

Are branches required to comply with the Regulations?

Branches registered in the UAE are considered to not have a separate legal personality from their parent company or head office; they are regarded as extensions of these entities.

A foreign entity’s branch that is registered in the UAE and carries out a Relevant Activity is required to comply with the Regulations unless its income is subject to tax in a jurisdiction outside of the UAE (categorising it as an Exempt Licensee).

What is a Relevant Activity?

Any one of the following businesses is considered to be a Relevant Activity:

  • Banking,
  • Insurance,
  • Investment fund management,
  • Finance and leasing,
  • Headquarters,
  • Shipping,
  • Holding company,
  • Intellectual property, and
  • Distribution and service centre.

Are there any exceptions to the Regulations?

Yes. The Regulations identify “Exempt Licensees” which are not required to meet the Economic Substance Test. These are:

  • An investment fund which is not self-managed.

  • A Licensee that is a tax resident in a jurisdiction other than the UAE.

  • A Licensee that is a branch of a foreign entity and its income is subject to tax in a jurisdiction other than the UAE.

  • A Licensee wholly owned by one or more UAE residents which is not part of a Multinational Enterprise Group (“MNE Group”)[2] and all of the Licensees’ activities are carried out in the UAE.

  • Any Licensee granted the status of Exempt Licensee by decision of the Minister of Finance.

An Exempt Licensee must still file a Notification and submit sufficient evidence to substantiate its status as Exempt Licensee each financial year it claims this status.

What is the Economic Substance Test?

The purpose of the Regulations is to establish the requirements that a Licensee must comply with for it to be considered to have economic substance. In general, the Economic Substance Test aims to determine:

  • Whether the Licensee and the Relevant Activity are being directed and managed in the UAE,

  • Whether the core income generating activities (“CIGAs”) are being conducted in the UAE, and

  • The Licensee has adequate employees, premises, and expenditure in the UAE.

What are my obligations if I am a MNE Group?

MNE Groups are required to submit a different Notification and Statement pursuant to Cabinet Decision No. 44 of 2020 on the Regulation of the Reports Submitted by MNEs.


If I am a Licensee, what do I need to do?

Firstly, an assessment of your Relevant Activity and its CIGAs should be undertaken each financial year to determine what filings you are required to submit.

Generally, there are two filings per financial year to be submitted on the Ministry of Finance’s ESR portal: (i) a Notification and (ii) a Report.

Undergoing an assessment will help you define your obligations. For example, all Licensees are required to submit a Notification. However, only Licensees that generated an income during the financial year are required to file the Report.

What is the difference between the two types of filings?

The Notification is a general submission indicating whether you are engaged in a Relevant Activity and earned income from it, whether you are an Exempt Licensee, and the commencement and end dates of your financial year.

The Report, on the other hand, is a more detailed submission and requires the following information: the income and expenditures related to each Relevant Activity, the size of the premises, the number of employees, whether you outsourced any of your CIGAs, the  number of board meetings held in the UAE, among others. It also requires the submission of either audited or unaudited financial statements or management accounts for that period. All Licensees that generated income from a Relevant Activity are required to file the Report.

When does the reporting start and when should I file?

The Regulations apply to financial years starting on or after 1 January 2019.

The Notification must be filed within six months from the Licensee’s financial year-end.

The Report must be filed within twelve months from the Licensee’s financial year-end.

Who determines whether a Licensee has fulfilled the requirements of the ESR?

The UAE Federal Tax Authority (“FTA”) is in charge of determining whether a Licensee has fulfilled or not the Economic Substance Test.

The FTA is also authorised to impose the applicable penalties and hear and decide appeals.

What are the consequences for non-compliance with the Regulations?

The penalties for not complying with the Regulations, including failing to file the Notification or the Report, failing to meet the Economic Substance Test, or furnishing inaccurate information, have administrative penalties ranging AED 20,000 to AED 50,000. If, for example, a Licensee fails to meet the Economic Substance Test for a second consecutive occasion, then the administrative penalty shall be AED 400,000.

Furthermore, in the event the Licensee has failed to meet the Economic Substance Test, the FTA shall inform the UAE Ministry of Finance which, in turn, shall provide the Licensee’s relevant information to the foreign competent authority of the country or territory where the Licensee’s parent company, the ultimate parent company and the ultimate beneficial owner reside. The exchange of information would be made pursuant to an international agreement or treaty.

Is there a statute of limitations?

Any determination by the FTA of a Licensee’s failure to meet the Economic Substance Test and/or any imposition of administrative fines should be made within six years from the Licensee’s year-end period for which the determination is made.

However, this limitation would not apply if the FTA was unable to make a determination within the period by reason of a misrepresentation, fraudulent action or gross negligence by the Licensee or by any other person.  

Is there anything else I need to be aware of?

For the purposes of conducting any administrative investigation, the FTA and the and the Licensee’s Regulatory Authority are authorised to enter the Licensee’s business premises to ensure compliance with the Regulations and/or examine documents or take copies. Should production of documents be required, prior notice would be provided to the Licensee.

The Regulatory Authority is generally the authority with which a Licensee is registered.


Meeting the Economic Substance Test and submitting the filings imposed by the Regulations are of the utmost importance and must be complied with. Failure to do so may expose your business to administrative fines, inability to continue your Relevant Activity and/or repercussions in foreign jurisdictions (if applicable to you).


[1] A sole proprietorship is an entity that does not possess an independent legal personality from that of its sole owner.  

[2] Means any group consisting of either (a) two or more entities the tax residence for which are in different jurisdictions or (b) an entity that is resident for tax purposes in one jurisdiction and is subject to tax, with respect to the activities carried out through a branch or permanent establishment, in another jurisdiction.  

Our Experience

lecocqassociate provides a full range of financial regulatory, corporate and commercial advice in relation to the structuring and incorporation of financial entities.

Should you have any specific questions regarding whether you fall under the purview of the Regulations, whether you meet the Economic Substance Test and/or your filing obligations, please do not hesitate to contact us: at

Sofiana Bird Loustaunau
Sofiana Bird Loustaunau
Head of Office