The Organisation for Economic Co-operation and Development (OECD) has set guidelines to combat tax avoidance through tax base erosion and profit shifting. As a member of the OECD inclusive framework, UAE is committed to ensure that the UAE’s legal and commercial framework is in line with global standards. As a part of this commitment and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Economic Substance Regulations (“ESR”) in April 2019.

These regulations are recently amended by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020, and updated Guidance was issued on 19 August 2020 (Ministerial Decision No. (100) of 2020.

ESR is applicable to all licensees carrying out a ‘Relevant Activity’ in the UAE. This includes licensees in Free Zones, Financial Free Zones and Offshore Free Zones. The regulations apply to financial year commencing from 1 January 2019.

Licensees within the scope of ESR are required to submit notification and report confirming whether they undertake any Relevant Activity and meet the ESR tests.

For more details, please refer our FAQs below :


The UAE introduced Economic Substance Regulation (ESR) on 30 April 2019 through a Cabinet of Ministers Resolution No. 31 of 2019.

This was done as a part of UAE’s commitment as a member of the OECD Inclusive Framework to implement the action points of OECD base erosion and profit shifting framework for countries across the globe with low or no corporate taxes where harmful tax practices such as tax avoidance and evasion are prevalent. UAE’s move to implement ESR also came in response to an assessment of the UAE’s tax framework by the European Union (EU) Code of Conduct Group on Business Taxation

The objective of this new regulation is to ensure that all legal entities in UAE have genuine substance in the region and are reporting actual profits generated from activities conducted in the region.

In consultation with the OECD and the EU, the Ministry of Finance (MoF) has made amendments to the Regulations and the revised Regulations were announced through Cabinet of Ministers Resolution No. 57 of 2020 signed on 10 August 2020 and updated Guidance was issued on 19 August 2020 (Ministerial Decision No.100 of 2020)

The amended ESR legislation and guidance are as follows:

· Cabinet of Ministers Resolution No. 57 of 2020 revoking the erstwhile ESR regulation

· Ministerial Decision No. 100 of 2020 (Guidance)including the Relevant Activities guide

The FAQs are also published by the Ministry of Finance on their website along with the flowchart .

The Ministry of Finance has launched ESR portal filing

The amended ESR legislation has brought in certain changes. Some of these which may require the licensee to re-assess are:

  • Legal type of licensees covered under ESR. Refer Q5 below for details
  • Treatment of branches. Refer Q10 below
  • Definition of certain Relevant Activities. Refer Q6 below
  • Exemptions. Refer Q9 below.

ESR applies to all judicial persons and unincorporated partnerships licensed with HFZA carrying on one or more “Relevant Activities” in UAE.

The following persons are not covered under the Regulations:

  • A natural person
  • A sole proprietorship
  • A Trust
  • A Foundation

Further, ESR is not limited to companies which are a part of foreign multinational group.

If a Licensee does not undertake any Relevant Activity, it does not have comply with the ESR.

The Relevant Activities under the Economic Substance Regulations are:

· Banking Businesses
· Insurance Businesses
· Investment Fund Management Businesses
· Lease-Finance Businesses
· Headquarters Businesses
· Shipping Businesses
· Holding Company Businesses
· Intellectual Property (IP) Businesses
· Distribution and Service Centre Businesses

The MoF has released guide for relevant activities which is attached as an annexure to the Ministerial decision.

It is important to note that there has been changes to the definition of Distribution and Service Centre Business and High Risk IP business.

Distribution and Service Centre Business :

The old definition of a ‘Distribution and Service Centre Business’ required the purchase of goods from a Foreign Connected Person, importing goods into UAE and subsequently reselling them outside UAE. This was amended to exclude the requirement to import and export goods from UAE. The new definition now only requires the purchase and resale of goods.

The definition of a Distribution and Service Centre Business has also been amended to exclude the requirement of the services to be in connection with a business outside UAE. Therefore, licensees providing any services to a Foreign Connected Person will now qualify as service center business.

High Risk IP Business:

The definition of a High Risk IP business has been narrowed. The condition relating to a licensee not carrying out any research and development, or branding, marketing and distribution as part of its core income-generating activity in the UAE has been removed in the new definition.

No, substance over form approach should be adopted. The licensee is required to look beyond what is stated on the commercial license for the activities actually undertaken during the financial period.

The licensee is not required to comply with the ESR tests. However, the licensee is required to submit the notification for ESR.

The following licensees are exempt from ESR under the amended Regulations:· A Licensee that is tax resident outside the UAE;
· An Investment fund and its underlying SPVs / investment holding entities;
· A wholly UAE resident-owned business that is not part of a multinational group and that only carries on business in the UAE
· A branch of a foreign entity that is subject to tax on all of its Relevant Income in a foreign jurisdiction.Please note that sufficient evidence must be submitted along with the Notification form to claim any of the above exemptions.

There are three types of branches:

1. Local branches of UAE entity
2. UAE branch of foreign company
3. Foreign branch of UAE entity

The matters to be considered for each of these scenarios is listed below:

1. Local branches registered in the UAE are an extension of their parent/head office and do not have separate legal personality. Therefore, the entity with its head office registered in the UAE must file ESR notification and report as a single Licensee, reporting the Relevant Activities of itself and all its branches.

2. A UAE branch of a foreign entity that carries out a Relevant Activity will be within the scope of ESR as if it were a separate legal person, unless the branch is claiming exemption from ESR.

3. The UAE entity is not required to consolidate the activities and income of the foreign branch provided the Relevant Income of the foreign branch is subject to tax in the foreign jurisdiction where the branch is located.

In this context, a branch can include a permanent establishment or any other form of taxable presence for corporate income tax purposes which is not a separate legal entity.

There are three tests for ESR:

· The relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE;
· The Relevant Activity is being directed and managed in the UAE;
· The entity should have adequate employees, premises and expenditure in the UAE.

Please refer our webinars
MoF website for detailed understanding of each of the above tests.

The CIGAs are activities which are of central importance for generating income from the Relevant Activity identified. The MoF has clarified that CIGAs listed in the ESR Regulations are illustrative and not exhaustive. Each licensee has to consider the CIGAs depending on the nature of business and ensure that the CIGAs are performed in UAE.

No, but the directors should be physically present in the UAE when key decisions are made during the relevant board meetings in relation to the Relevant Activity of the Licensee.

Yes, the board of directors are required to meet at adequate frequency. For each board meeting held in the UAE:

  • A quorum of directors must be physically present in the UAE;
  • Meeting minutes must be maintained and signed in the UAE; and
  • Directors attending the board meeting must have the necessary knowledge and expertise to discharge their duties.

The regulations and Guidance therefore do not provide a minimum standard for what is considered “adequate” or “appropriate”. The Licensees are required to prove that the expenditure, employees and assets in UAE are adequate depending on the nature and level of activities carried out, and the level of income earned by the Licensee.

The Reportable Period is the financial period commencing from 01 January 2019.
For example- An entity having financial year starting 1 January 2019 to 31 December 2019, the reportable financial year under ESR will be 1 January 2019 to 31 December 2019.

All the licensees in HFZA within the scope of ESR and licensees claiming exemption are required to submit an annual notification under ESR within 6 months from the end of its financial year.

Non-exempt licensees who earn income from Relevant Activities during a particular financial year will also be required to file an annual report under ESR within 12 months from the end of its financial year.

All the licensees in HFZA within the scope of ESR (i.e. performing a Relevant Activity) and licensees claiming exemption are required to resubmit a notification. We will provide an update on the method of this resubmission shortly.

Yes , you may download your previous submitted notification to HFZA through the E-portal.

Licensees having financial year commencing on or after 1 January 2019 and ending 31 December 2019 is 30 June 2020.

There is no statutory requirement to file the notification by 30 June 2020. The notification deadline will be announced shortly.
No penalties will apply if a notification for financial years ending after 31 December 2019 is not submitted by 30 June 2020.

No, in the above example, the Licensee’s first reportable period will be 1 January 2020 to 31 December 2020 and the first Notification would be due in 2021.

Non-compliance with the obligation to file an ESR notification or any relevant information within the deadline shall attract a penalty AED 20,000.

First year of failure

  • Administrative penalty of AED 50,000; and
  • Information exchange with foreign competent authority of:
    • ✓ parent company;
    • ✓ ultimate parent company; and
    • ✓ ultimate beneficial owner

Second consecutive year of failure

  • Administrative penalty of AED 400,000
  • Information exchange with foreign competent authorities as above;
  • Any other administrative action including potential suspension, revocation or non-renewal of the Commercial license.

Providing incorrect or false or misleading information in the ESR report form shall be subject to a penalty of AED 50,000 under the UAE ESR laws. This can further result in the licensee being treated as having failed the ESR test for the relevant financial year.

ESR is a self-assessing requirement. HFZA is unable to make decisions on behalf of the licensees as HFZA is required to validate the information submitted in ESR notification and reports by the licensees.

If you require further information or advise, please refer to the MoF website or contact professional advisors.

For awareness Webinar on Economic Substance Regulations :

– Webinar Hosted by our consultants :

1. Key updates under the amended ESR low – 5 October 2020

2. How to submit ESR notification and report – 24 December 2020

– Webinar Hosted by Ministry of Finance


1. MoF interactive e-learning about Economic Substance and the Relevant Activities

2. New Cabinet Resolution No 57 of 2020 revoking Cabinet Resolution No 31 of 2019

3. Ministerial Decision 100 of 2020 ESR Guidance and Relevant Activities Guide Issued 19 August 2020

4.Economic Substance UAE Economic Substance Flowchart

5. MoF FAQs

6. Economic Substance Regulations filing portal


Please send any questions you may have with regard to Economic Substance Regulation to ESRsupport@hfza.ae