Substance in UAE: an Overview

What is Economic Substance

Economic substance in UAE refers to the business presence of a company within a jurisdiction, reflected in having a physical office, a local resident as a shareholder or participant, employed staff, actual business operations, and other related factors.

The complete regulatory framework concerning economic substance in UAE is available on the official UAE Government website. All business entities that fall under the regulations are required to maintain sufficient economic presence within the Emirates.

Economic Substance in the UAE: Who is Subject to the Rules?

The economic substance rules apply to both individuals and legal entities (including resident companies as well as entities registered in offshore jurisdictions and free zones of the UAE) that are engaged in one or more of the following “Relevant Activities”:

1. Banking business;
2. Insurance business;
3. Investment fund management;
4. Leasing and finance;
5. Holding company activities;
6. Distribution business;
7. Intellectual property business;
8. And others.

A more detailed description of the activities covered by these requirements can be found in the document Guidance and Relevant Activities Guide, published on the UAE Government website.

With the recent introduction of corporate income tax in UAE, adequate economic substance is also required if a company desires to leverage some of the available tax incentives.

What is Required from Companies to Comply with Substance in UAE?

Companies engaged in one or more of the activities listed above must first notify the relevant regulatory authority in the UAE.

In addition, during each financial period, companies that fall under the economic substance requirements and generate income from relevant activities in the UAE must undergo an “Economic Substance Test” and submit a dedicated “Economic Substance Report” to the regulatory authority. These requirements must be met within 12 months following the end of the financial period. Each regulatory authority sets the specific format of the report and the procedure for its submission, depending on the nature and location of the company’s activities.

Brief Action Steps

1. Determine whether the economic substance in UAE rules apply to the company (i.e., whether the company engages in any of the Relevant Activities);
2. If applicable, prepare to submit both the notification and the Economic Substance Report;
3. Additionally, if the company conducts one or more of the specified activities (even passively) and derives income from them, review the company’s corporate structure and complete the Economic Substance Test.