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  • Ministerial Decision on Economic Substance Rule in UAE

Ministerial Decision on Economic Substance Rule in UAE

19 September 2019

Following the release of Cabinet Decision No. 31 on Economic Substance requirements (“ESR”) earlier this year, the UAE Ministry of Finance has now published Ministerial Decision No. 215, which provides guidance on the implementation of the ESR test.

Key points from the guidance:

  • Licensees: As per the Ministerial Decision, every licensee carrying out ‘relevant activity’ in the UAE (including free zones or financial free zones) from which it derives an income, will be required to meet the ESR test. This suggests that a licensee carrying out a ‘relevant activity’ that does not generate any income, might be outside the scope of the ESR. For example, this might apply in the case of some holding companies.

           The Ministerial Decision confirms that the ESR do not apply to entities owned (directly or indirectly) by                 Federal Government or Government Authorities or bodies. To fall outside the scope of the ESR, the                     Government Authority or body must hold at least a 51% shareholding interest in the entity.

  • Reporting Requirements: Licensees are required to notify the Regulatory Authorities with effect from 1 January 2020, if they are carrying out a relevant activity. The notification will also include confirmation of whether the gross income (partially or wholly) relating to the relevant activity is subject to tax in any jurisdiction outside the UAE and date of the end of the financial year. The Ministerial Decision confirms that the reporting requirement applies on licensees having financial years commencing on or after 1 January 2019.

           Each Regulatory Authority will prescribe its own format for reports and related mechanisms.

  • Regulatory Authority function: The Decision provides guidance to Regulatory Authorities on steps and measures to be taken to determine compliance by licensees. It also provides guidance on steps to be taken and the penalties to be charged where a licensee is discovered to be non-compliant.

           Read more about the update here