UAE overhauls its Economic Substance legislation

In brief

The United Arab Emirates (UAE) has made significant changes to its Economic Substance regime, with the UAE Cabinet of Ministers recently issuing Cabinet Decision No. (57) of 2020 (the new ESR Resolution). The new ESR Resolution repeals and replaces Cabinet Resolution No. (31) of 2019, as amended, and Cabinet Resolution No. (58) of 2019, which was published in June 2019. The Ministry of Finance also updated its Guidance via Ministerial Decision No. (100) of 2020.

Licensees in the UAE should now carefully consider how the new ESR Resolution impacts their compliance and reporting obligations, particularly as the application scope has been amended.

In this update, we have highlighted the key changes introduced by the new ESR Resolution.

Exempt Licensees

  1. Investment Fund;
  2. Licensee that is a tax resident in a jurisdiction other than the UAE;
  3. Licensee that is ultimately wholly and beneficially owned (directly or indirectly) by UAE residents (which means UAE citizens and individuals holding a valid UAE residency permit who reside in the UAE) and meets the following two requirements:

a.    The entity is not part of a MNE Group, which consists of either (a) two or more entities which are tax residents in different jurisdictions; or (b) one entity which is a tax resident in one jurisdiction and is subject to tax for carrying out Relevant Activities through a branch or permanent establishment in another jurisdiction.

b.    All of the entity's activities are only carried out in the UAE.

  1. Licensee that is a branch of a foreign entity and of which the income from the relevant activity is subject to tax in a jurisdiction other than the UAE; and
  2. Any Licensee for which a resolution is issued by the Minister of Finance to be granted the capacity of "Exempt Licensee".

An Exempt Licensee is required to submit - along with the Economic Substance Notification - all required information and documents confirming its capacity as an Exempt Licensee to its Regulatory Authority (ie, the authority that issued the license). This could include tax certificates and tax assessments for Licensees that claim exemption under points (ii) or (iv) in the above requirements.

Failure to comply with the notification requirement and the provision of documentation supporting its status, will require the Exempt Licensee to meet the Economic Substance requirements and all other obligations under the new ESR Resolution.

The National Assessing Authority (clarified further below) will provide the Ministry of Finance with all the required information for Licensees that claim to be exempt. Information provided by Licensees that claim exemption under points (ii) or (iv) above, may be shared by the Ministry of Finance with the foreign competent authority subject to the provisions of an international agreement.

Reporting deadlines

It has now been clarified that the deadline to submit the Economic Substance Notification is 6 months after the end of the financial year. Licensees that have already submitted the Notification to the Regulatory Authority (most Licensees with financial year-end 31 December 2019 should have already submitted this) are required to re-submit this via the portal of the Ministry of Finance once available.

The Economic Substance Report should be submitted within 12 months after the end of the financial year. The format of the report will be published by the National Assessing Authority.

Distribution and service center business

The scope of the Relevant Activity of the Distribution and Service Center business has been widened. It now also includes Licensees that purchase goods from foreign connected persons and sell those goods to customers in the UAE in addition to customers established outside the UAE.


The penalties for non-compliance are:

  1. A fine of AED 20,000 for failure to submit the Economic Substance Notification (and any relevant information or documents);
  2. A fine of AED 50,000 for submitting inaccurate information; and
  3. A fine of AED 50,000 for failure to submit the Economic Substance Report or failure to meet the Economic Substance requirements. If the Licensee commits the same violation in a subsequent year, a fine of AED 400,000 and any other administrative procedures, including the suspension, withdrawal or non-renewal of the license.

National Assessing Authority

The Federal Tax Authority is appointed as the National Assessing Authority. Among other things it is responsible for:

  1. Deciding whether the Licensee or Exempt Licensee has fulfilled the Economic Substance requirements;
  2. Applying administrative fines;
  3. Considering grievances and deciding thereon; and
  4. Reporting to the Ministry of Finance (when required).

For further information, please feel free to contact one of the lawyers above or your usual Baker McKenzie contact.

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