Background of the Introduction of Economic Substance Regulations in the UAE

Economic Content in the UAE: briefly on the main changes that everyone should know

As you recall, on March 12, 2019, the Council of the European Union (hereinafter referred to as the “Council”) published a list of non-cooperative jurisdictions for tax purposes (hereinafter referred to as the “EU Black List”), which included the United Arab Emirates (“UAE”) and Oman. The reason for the inclusion of the UAE in the EU black list was the failure to comply with the requirements for economic content by the deadline of December 31, 2018 (see our publication on this topic). In the light of these events, on April 30, 2019, the UAE adopted Resolution of the Cabinet of Ministers No. 31 on the establishment of requirements for economic content (hereinafter - the “Resolution”).

This article is kept as background context. It explains why the UAE introduced ESR and how the original logic developed. For the current position after the 2024 amendments and the shift toward corporate tax as the main compliance framework, read our updated guide to the UAE Economic Substance Regulations amendments.

To whom and how does the economic content requirement apply?

Economic content is essentially a combination of attributes and resources, the presence of which is necessary for the implementation of a particular type of activity. Requirements for economic content are presented to determine the “reality” of a legal entity and its operations.

The adopted Resolution applies to companies registered in the UAE (including, but not limited to, companies in the free economic zone) and applies to legal entities whose main activities are:

• Banking;
• Insurance;
• Fund management;
• Investment holding;
• Transportation;
• Financing and leasing;
• Distribution and service center;
• Holding companies; and
• Intellectual property (IP).

Companies carrying out the above activities must satisfy the following requirements for economic content:

• Carry out appropriate activities in the UAE;
• Managed and supervised from the UAE;

• Have a sufficient number of qualified full-time employees in the UAE;
• Carry sufficient operating expenses in the UAE;
• Have a sufficient number of assets (office / equipment, etc.) in the UAE necessary for carrying out activities.

It is generally accepted that the concept of “sufficient” will be determined on an individual basis, depending on the characteristics of the company itself. Also, if the company carries out several types of activities, then it will need to comply with the requirements for economic content for each of these types of activities. In addition, the Decree contains requirements for corporate governance of companies, in particular with respect to the board of directors, its meetings held in the country, members of the board of directors, quorum and minutes of meetings of the board of directors.

What will happen now?

The inclusion in the EU blacklist does not mean that the country will remain there forever. Earlier, in 2017, the UAE was also included in the very first EU blacklist, however, already at the beginning of 2018, after making certain commitments to the EU, the UAE was able to go to Appendix 2 of the Council Conclusions (also known as the “gray list”). The EU Council may remove countries from its list after it is confirmed that these countries have reviewed and clarified EU concerns about their tax system. According to UAE officials, the country has committed itself to the EU within a specific time frame that will be implemented in the UAE in accordance with the internal legal process and constitutional requirements.

How will this affect the business?

Transnational corporations and international companies must take into account the stricter reporting and control rules imposed on them in order to increase the transparency of operations and conduct business in the UAE. It should be noted that the UAE was already included in the Black List earlier, but subsequently were able to successfully withdraw from it. We expect the story to happen again and the UAE will be removed from the list by the end of this year. Nevertheless, in the near future we expect the introduction of requirements for economic presence in the country (for example, the presence of an office and personnel), as well as the introduction of corporate income tax at a reduced rate. We also expect strengthened internal audit procedures for opening bank accounts. We strongly recommend that you make sure that your accounting documents are in good condition and that you consider starting to introduce certain attributes and signs of economic presence.

If you need help reviewing historical ESR exposure or aligning your structure with the UAE’s current tax and reporting logic, learn more about our UAE tax consultancy services.