Requires UAE licensees carrying on nine Relevant Activities (banking, insurance, fund management, lease-finance, headquarters, shipping, holding company, intellectual property, distribution and service centre) to meet an economic substance test and file an annual notification and report within 12 months of year end, for financial years from 1 January 2019; replaced Cabinet Resolutions No. 31 and No. 58 of 2019.
Cabinet of Ministers Resolution No. 57 of 2020 is the UAE's Economic Substance Regulations. It required every UAE licensee carrying on one of nine Relevant Activities to have real economic substance in the UAE and to file an annual notification and an Economic Substance Report, for financial years starting on or after 1 January 2019. It took effect on its issue on 10 August 2020, replacing Cabinet Resolutions No. 31 and No. 58 of 2019 and applying to financial years commencing on or after 1 January 2019. Following Cabinet Decision No. 98 of 2024 the notification and reporting requirements no longer apply to financial years ending after 31 December 2022, but the resolution remains in force for the 2019 to 2022 years, and the FTA can still assess and penalise those years within the six-year window in Article 7.
Article 3 lists the Relevant Activities: banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding company, intellectual property, and distribution and service centre business, and describes the Core Income Generating Activities for each. A Licensee is any juridical person or unincorporated partnership registered in the UAE, including in a free zone or financial free zone, that carries on a Relevant Activity. Exempted Licensees are investment funds, entities tax resident outside the UAE, entities wholly owned by UAE residents that are not part of a multinational group and operate only in the UAE, and branches of foreign entities whose income is taxed abroad; they file the notification with evidence of their status but not the report.
Article 6 sets the Economic Substance Test: the Core Income Generating Activity is conducted in the UAE, the activity is directed and managed in the UAE through board meetings held here with a physically present quorum, signed minutes recording strategic decisions and records kept in the UAE, and there are adequate qualified full-time employees, operating expenditure and physical assets in the UAE. Outsourcing is allowed only to a UAE provider under adequate supervision whose resources are not double counted. A pure holding company meets a reduced test of regulatory filings and adequate employees and premises, and no test applies in a year with no Relevant Income. Article 8 requires the annual notification of the Relevant Activity, whether Relevant Income was earned and the financial year dates, and the Economic Substance Report within twelve months of the financial year end, including income, expenses, assets, premises, employees, financial statements and a declaration.
Articles 13 to 15 set the penalties: AED 20,000 for failing to file the notification, AED 50,000 for failing to file the report or to meet the test, AED 400,000 for failing the test in the following year as well, with possible licence suspension or revocation, and AED 50,000 for knowingly providing inaccurate information. Article 17 gives a right of appeal to the FTA.
Every juridical person and unincorporated partnership registered in the UAE, in the mainland, a free zone or a financial free zone, that carried on banking, insurance, fund management, lease-finance, headquarters, shipping, holding company, intellectual property or distribution and service centre business in financial years from 2019 to 2022, and the licensing authorities and FTA that administer the regime.
| Article 1 | A Licensee is any juridical person or unincorporated partnership registered in the UAE, including free zones and financial free zones, carrying on a Relevant Activity; Exempted Licensees are investment funds, foreign tax residents, wholly UAE-owned non-MNE entities operating only in the UAE, and branches of foreign entities taxed abroad. |
| Article 3 | The nine Relevant Activities are banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding company, intellectual property, and distribution and service centre business, each with its Core Income Generating Activities. |
| Articles 4–5 | The licensing authorities, including free zone authorities and financial free zone authorities, are the Regulatory Authorities that receive filings; the Federal Tax Authority is the National Assessing Authority that assesses the test, imposes penalties and hears appeals. |
| Article 6(1)–(2) | The Economic Substance Test requires the Core Income Generating Activity to be conducted in the UAE, the activity to be directed and managed in the UAE, and adequate qualified full-time employees, operating expenditure and physical assets in the UAE; outsourcing is permitted only to a UAE provider under adequate supervision without double counting. |
| Article 6(3)–(4) | Directed and managed means board meetings held in the UAE at adequate frequency with a quorum physically present, written minutes signed by attending directors recording strategic decisions, directors with the necessary expertise, and minutes and records kept in the UAE; the same applies to managing shareholders, partners or managers. |
| Article 6(5)–(6) | A Licensee restricted to Holding Company Business meets the test by complying with its regulatory filing requirements and having adequate employees and premises; no test applies in a financial year with no Relevant Income. |
| Article 7 | The FTA may determine that the test was not met within six years after the end of the financial year, or later where misrepresentation, fraud or gross negligence prevented a timely determination; a High Risk IP Licensee is presumed to fail unless it proves otherwise. |
| Article 8 | Every Licensee and Exempted Licensee files an annual notification of its Relevant Activity, whether Relevant Income was earned and its financial year dates; a Licensee required to meet the test files an Economic Substance Report within twelve months of the financial year end covering income, expenses, assets, premises, employees, financial statements and a declaration. |
| Article 13 | Failure to submit the notification and related documents carries an administrative penalty of AED 20,000, notified with reasons and a payment date at least 30 business days after the notice. |
| Article 14 | Failure to submit the Economic Substance Report or to meet the test carries AED 50,000; the same failure in the immediately following financial year carries AED 400,000 and may lead to suspension, revocation or non-renewal of the licence. |
| Article 15 | Knowingly providing inaccurate information to the Regulatory Authority or the FTA without correcting it carries AED 50,000. |
| Article 21 | Repeals and replaces Cabinet Resolutions No. 31 of 2019, as amended, and No. 58 of 2019. |
AED 20,000 for failing to submit the notification (Article 13); AED 50,000 for failing to submit the Economic Substance Report or failing to meet the Economic Substance Test (Article 14); AED 400,000 for failing the test in the immediately following financial year, with possible suspension, revocation or non-renewal of the licence (Article 14(3)); and AED 50,000 for knowingly providing inaccurate information (Article 15). Penalties are payable not less than 30 business days after the notice and may be appealed to the FTA under Article 17 on the grounds that the violation was not committed, the penalty is disproportionate or it exceeds the prescribed limit.
As registered agent for RAK ICC companies and free zone companies in RAKEZ, DMCC, IFZA, Ajman and elsewhere, we filed ESR notifications and reports for clients for every financial year from 2019 to 2022, most of them holding companies relying on the reduced test in Article 6(5) and distribution and service centre businesses. Filings stopped with the 2023 year, but the work has not: the FTA's six-year assessment window keeps the 2019 to 2022 years open until 2025 to 2028, and clients still receive AED 20,000 and AED 50,000 penalty notices for those years, which we review against the filing record and appeal under Article 17 where the filing was made or the entity was exempt. We also keep the board minutes and substance evidence for those years on file, and we point clients to the Corporate Tax Law's own substance test for free zone status, which has replaced ESR as the live substance question.
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