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introduced to Resolution 31 by the Cabinet of Ministers by way of Cabinet of Ministers Resolution No. 57 of 2020, which repealed and replaced Cabinet of Ministers Resolution No. 31 of 2019.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
- Ministerial Decision No. 100 of 2020 (Guidance).
Application in ADGM
In ADGM, Licensees and Exempted Licensees may include companies, partnerships or branches of foreign companies or partnerships, that are registered in ADGM for financial years commencing on or after 1 January 2019.
The ESR requires ADGM 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.
The ESR exempts the following ADGM Licensees from the requirement to meet the Economic Substance Test:
- Investment Funds;
- Entities that are tax resident in a jurisdiction other than the UAE;
- Entities wholly owned by UAE residents and meet the following conditions:
- The entity is not part of a MNE Group (as defined in the ESR), and
- The entity only carries out business in the UAE;
- A branch of a foreign entity, the Relevant Income of which is subject to tax in a jurisdiction other than the UAE.
However, ADGM Exempted Licensees must still file an economic substance annual notification to the Registration Authority along with sufficient evidence substantiating its status as an Exempted Licensee.
Economic Substance Requirements
All ADGM 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.
ADGM 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.
Administration in ADGM
The ADGM Registration Authority is the Regulatory Authority administering ESR in the ADGM.
This section of the website contains information about ESR, as well as useful links and resources to assist ADGM Licensees and Exempted Licensees to understand and comply with its requirements.
ESR Contact Information
For ESR enquiries email: email@example.com.
ESR requires ADGM 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.
All ADGM registered firms are expected to assess and determine whether they conduct Relevant Activity(s) and therefore whether they are within scope of ESR. The approach to making such a determination should consider ‘substance over form’, and not just the activities stated on a firm’s ADGM Commercial License / Financial Services Permission.
Guidance on Relevant Activities
The UAE Ministry of Finance has published Ministerial Decision No. 100 of 2020 as updated guidance on the ESR (replacing Ministerial Decision No. 215 of 2019). The guidance includes a section containing information on the meaning of each of the Relevant Activities.
All ADGM Licensees and Exempted Licensees (i.e. persons that carry on one more “Relevant Activities”) are required to notify the Registration Authority of the following annually (regardless of being exempt or not earning income), i.e. the “Annual Notification Requirement”:
- the Relevant Activity being carried out during the Relevant Financial Year.
- whether it has generated Relevant Income during the Relevant Financial Year.
- the date of commencement and end of its Financial Year.
- any other information or documents as may be requested by the Registration Authority.
A notification submitted by an Exempted Licensee must be accompanied by sufficient evidence to substantiate the Exempted Licensee’s status for each category in which it claims to be exempt.
The notification must be submitted within six months from the end of the Financial Year of the Licensee or Exempted Licensee.
The notification must be submitted electronically on the Ministry of Finance Portal (a link to the Portal will be provided in due course).
Economic Substance Report
ADGM 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.
- File an Economic Substance Report.
The Economic Substance Report is due within 12 months of the end of the Licensees’ Relevant Financial Year (Accounting Reference Period).
Therefore the first Economic Substance Report will be due by 31 December 2020.
Note: Exempted Licensees or Licensees that carry on a Relevant Activity but did NOT derive income from that activity during a Relevant Financial Year, do NOT need to file an Economic Substance Report for that Relevant Financial Year (however a Notification is still required).
The report must be submitted electronically on the Ministry of Finance Portal (a link to the Portal will be provided in due course).
Useful links and resources
Please note that the economic substance related information provided in this section of the website is subject to change, through Federal legislation or guidance, and should not be relied on without seeking independent advice and confirming the currency/validity of the information.
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