Out-Law Guide 4 min. read

Economic substance rules in the UAE

Economic substance rules were introduced in the United Arab Emirates (UAE) in April 2019, and businesses need to assess how they comply with those rules.

Economic substance regulations have recently been introduced across the globe in countries with no or nominal corporate tax rates in order to comply with international initiatives to combat harmful tax practices.

In essence the new rules require certain legal entities established in those countries to demonstrate that they carry out substantial economic activities there.

Why are the rules important?

The United Arab Emirates' economic substance rules came into effect in April 2019 but, without established regulatory authorities or published guidance, businesses initially took a 'wait and see' approach to the Rules.

But in October 2019 the Ministry of Finance published guidance on the Economic Substance Rules and the regulatory authorities responsible for administering the Rules were appointed.

Therefore UAE businesses need to assess now whether they are required to comply with the Economic Substance Rules and, if so, implement strategies for compliance and prepare for the notification and reporting requirements.

The Economic Substance Rules require all UAE entities that are within scope of the Rules to notify the relevant regulatory authority beginning January 2020. Failure to do so will incur penalties of up to AED50,000 ($13,600). Although penalties for non-compliance with the remainder of the Rules may not be imposed until a later date, businesses that fail to implement compliance strategies now will be unable to avoid those penalties.

If your entity is within the scope of the rules you can find out what action to take in our guide to complying with the new UAE economic substance rules.

As the Economic Substance Rules have only recently been enacted and are subject to ongoing assessment and interpretation, there is still a degree of uncertainty as to how they will apply.

Does my business need to comply with the Economic Substance Rules?

Any entity licensed in the UAE to carry out a 'relevant activity' whether onshore or in a free zone and including in a financial free zone, is required to comply with the Economic Substance Rules.

The 'relevant activities' are: insurance; banking; lease financing; investment fund management; shipping; holding company; intellectual property; company headquarters, and distribution and service centres.

The definitions of company headquarters and service centre are potentially very broad and may capture many UAE businesses unaware that the Rules apply. Any UAE entity that deals with related entities overseas should seek advice on whether they are caught within the Economic Substance Rules.

Insurance, banking, lease financing and investment fund management

If an entity is licensed by the relevant UAE licensing authority to carry out any of these activities in the UAE, they will be required to comply with the Economic Substance Rules.


Shipping is defined in the Economic Substance Rules as being the operation of a ship anywhere in the world other than within the territorial waters of the UAE and includes any of the following activities:

  • transporting persons, animals, goods or mail by sea or chartering ships for such purpose;
  • selling travel tickets and ancillary services;
  • using, maintaining or renting shipping containers including trailers and other vehicles or equipment for the transport of shipping containers; or
  • ship crew management.

Holding companies

Holding companies which hold shares or equitable interests in other companies, earn dividends and capital gains from such shares and do not carry on any other commercial activity are within the scope of the Economic Substance Rules but have much lower compliance requirements.

Holding companies that generate income from activities other than capital gains and dividends or hold assets such as real estate or other investments will not fall within this category. Such a company will need to examine whether they fall under one of the other categories, such as a company headquarters or service centre, and whether they are required to comply with the usual Economic Substance Rules requirements. If not, they will fall outside the scope of the Rules.

Intellectual property

A business which is licensed in the UAE to hold, exploit or receive income from intellectual property assets, defined as being any intellectual property right in intangible assets including, but not limited to, copyright, trade marks, patents, brand and technical know how, are within scope of the Economic Substance Rules.

Headquarters business

Whether or not an entity is deemed to be a company headquarters will not depend on its position in the group but rather on the services it provides to other entities within the group.

Entities providing any of the following services to one or more overseas related entities will fall within the definition:

  • the provision of senior management;
  • the assumption or control of material risk for activities carried out by, or assets owned by, any overseas related entity; or
  • the provision of substantive advice in connection with the assumption or control of such risk.

The above definition appears to be quite broad and reflects the wording of similar legislation in other jurisdictions.

Arguably, if a UAE entity establishes a subsidiary overseas and manages that subsidiary from the UAE, it may be operating a headquarters business and be caught by the legislation. Any company which operates as part of a group should therefore review their arrangements to ascertain whether they are required to comply with the Economic Substance Rules.

Distribution and service centres

Although the definitions of distribution centres and service centres have been clumped together in the Economic Substance Rules, they are quite different businesses and the definition of service centre has the potential to bring a lot of companies within the scope of the Economic Substance Rules.

A service centre is a business providing services to a "connected person" resident outside the UAE in connection with a business outside the UAE. A "connected person" is an entity related through direct or indirect ownership or control, or common control. This definition could potentially capture companies forming part of a group not otherwise captured by the holding company or headquarters definitions.

As neither the Economic Substance Rules nor the Ministry of Finance guidance provide any definition or guidance for what sort of "services" are included in this definition it could potentially capture a company who provides services to a related overseas company such as the secondment of staff, technology services, payroll, HR or general business advice.

A distribution centre business on the other hand, is a business involved in the acquisition of goods, components or materials from a foreign "connected person" and the sale of such goods, components or materials overseas.

Are any companies exempt from the Economic Substance Rules?

There is an exemption for entities in which the federal government, the government of any Emirate or any governmental authority or body has at least 51% direct or indirect ownership.

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