After consultation with the Organization for Economic Co-operation and Development (OECD) and the European Union (EU), the UAE Cabinet of Ministers revoked the original Cabinet Decision No. 31 concerning Economic Substance Regulations (ESR) in the United Arab Emirates (UAE). An amended set of regulations was issued by way of Cabinet Resolution No. 57 of 2020 (PDF 492 KB), dated 10 August 2020, followed by the release of Ministerial Decision No.100 of 2020 (PDF 411 KB), dated 19 August 2020 serving as supplementary guidance with an updated Relevant Activities Guide attached as appendix. The frequently asked questions (FAQs) on the Ministry of Finance (MoF) website have also been updated to factor in the provisions, as per the new regulations.

The new regulations are meant to be enforced retrospectively on all licensees in the UAE from 1 January 2019 onwards. In view of this, licensees will be required to re-assess their current ESR classifications and align them in light of the amended regulations.

The amended ESR directs all licensees carrying out a relevant activity to re-file notifications that were filed for FY 19 (original due date 30 June 2020) through the MoF’s dedicated portal once it goes live. The ESR reports will also need to be uploaded onto the same portal within 12 months, following the end of the licensee’s financial year end (first reports due by 31 December 2020 for the financial year ended 31 December 2019).

Summary of key amendments

Below is a summary of the material changes to the ESR. For further details, please refer to the subsequent sections of this tax alert.
  • Role of FTA vs RAs: The UAE Federal Tax Authority (FTA) has been assigned the role of National Assessing Authority which is responsible for assessing and enforcing compliance with the economic substance tests in the UAE. Respective Regulatory Authorities (RAs), on the other hand, are responsible for collecting and checking the accuracy of notifications and reports submitted by the licensees.
  • Definition of Licensee: The definition of a “licensee” has been amended to mean juridical persons and unincorporated partnerships that carry out a relevant activity, while natural persons, sole proprietors, trusts and foundations (that were also considered as licensees under the original regulations) are no longer in scope of the ESR.
  • Exempted licensees: ESR exemption, earlier granted only to entities with 51% or more direct/indirect government ownership, has now been repealed. Under the new ESR, the following categories of licensees will be exempt:
  1. Investment funds;
  2. UAE branches of foreign companies;
  3. Licensees that are tax resident outside UAE;
  4. UAE resident-owned businesses; and
  5. Any licensee for which the Minister of Finance issues a decision to grant it capacity of an ‘exempt licensee’.
  • Exempted licensees that carry out a relevant activity still need to file notification along with sufficient evidence claiming the exemption.
  • Considerations for branches: The new regulations provide further guidance on how different branches (foreign and local branches of UAE companies, UAE branches of foreign companies) are to be classified and treated under ESR (details discussed below).
  • Changes to definitions of connected persons, group and certain relevant activities, viz., distribution centre, service centre, holding company and high-risk intellectual property (IP) business, which could change the ESR classification under the former provisions (refer to table for details).
  • Please note that there are no changes to the ESR tests which licensees need to undertake, as well as the definitions of the core income generating activities (CIGAs), except certain minor clarifications.
  • Notification deadline specified: Going forward, all notifications by licensees and exempted licensees carrying out a relevant activity, will need to be made within six (6) months from their financial year end. The reporting deadline remains the same, i.e. within twelve (12) months after the licensee’s financial year end. However, all notifications for financial year ended 31 December 2019 will have to be re-filed, once the portal goes live (expected in Q4 2020).
  • Administrative penalties have been increased (refer to table for details).

A comparative summary of the key changes between the old and new regulations, guidance and FAQs



Previous ESR



Role of FTA and RAs

RAs were assigned complete responsibility and expected to fully and solely administer ESR for their licensees

Now the responsibilities are split between the FTA and the RAs as follows:

1. FTA:

  • Undertake assessments to determine whether substance tests are met
  • Impose administrative penalties
  • Hear and decide on appeals
  • Provide information to the competent authority (MoF), for example, in case licensees:

(1)    did not met the economic substance test;

(2)    are high risk IP licensees;

(3)    are foreign tax residents; and

(4)    are branches of a foreign entity, the relevant income of which is subject to tax outside the UAE.

  • Report other information to MoF, as required

2. RAs:

  • Collect notifications/reports along with all supporting documents and review the accuracy and completeness of the same
  • Assess whether an exempted licensee has submitted sufficient evidence
  • Report information to FTA/MoF, as required

KPMG comments

Similar to VAT enforcement, all ESR appeals, assessments and audits will be undertaken by the FTA as the National Assessing Authority.


“Licensee” definition

A natural or juridical person licensed by the competent licensing authority(ies) in the UAE to carry out a relevant activity in the UAE (including a free zone and a financial free zone)


(a)    a juridical person (incorporated inside/outside the UAE); or

(b)    an unincorporated partnership (without separate legal personality)

that carries on a relevant activity.

FAQ #6 further provides that a natural person, a sole proprietorship, a trust, and a foundation are not considered “licensees” under the regulations.

KPMG comments

  • A licensee under ESR is now, by default, understood as one that undertakes a relevant activity. Thus, entities which do not undertake a relevant activity will not be required to file a notification/report (previously certain regulatory authorities required all entities licensed under their jurisdiction to file a notification, irrespective of whether they carried on a relevant activity).
  • A natural person undertaking a relevant activity in his own capacity or through a sole proprietorship, will not be considered as a “licensee” and thus, will be out of scope with respect to ESR.
  • Unincorporated partnerships/joint ventures that carry out a relevant activity and earn income therefrom will need to maintain proper books of accounts to document relevant income for reporting purposes.


Exempted licensees

Only entities in which the UAE government (at the federal/emirate level) has at least 51% direct or indirect ownership

  • Investment funds including the entities through which such investment funds directly/indirectly invest
  • Foreign tax resident entities
  • Businesses wholly owned by UAE nationals/UAE residents that are not part of an MNE group[1] and only have domestic activities (the term ‘UAE residents’ refers to either UAE citizens or individuals holding a UAE residency visa who reside in the UAE)
  • UAE branches of foreign companies whose entire relevant income is subject to tax in parent company jurisdiction
  • Any licensee for whom the MoF issues a decision to grant it capacity of an ‘exempt licensee’

Where the above licensees carry out a relevant activity, they will be required to submit notifications along with sufficient evidence to substantiate their exempt status. Failure to provide enough evidence to substantiate the exemption status could lead to such entities being subject to ESR, including the requirement to meet the economic substance tests and file ES reports.

Additionally, information on licensees claiming exemptions as foreign tax resident entities and branches of foreign companies whose entire relevant income is taxable in a parent company jurisdiction, will be automatically exchanged with foreign authorities where the parent company, ultimate parent company and ultimate beneficial owner(s) reside.

KPMG comments

  • Government-owned licensees carrying out relevant activities will now be in-scope and thus required to meet the economic substance requirements.
  • The amendment provides welcome relief for UAE-based entities that carry out business activities only in the UAE and are not part of an MNE group.
  • UAE residency criteria for individuals is linked to a residency visa, as opposed to physical number of days stayed in the UAE, whereas to qualify as a UAE tax resident for tax treaty purposes, a physical stay in the UAE of at least 183 days is required.
  • UAE branches of foreign companies in countries which either do not have a corporate tax regime or where the UAE branch income is not reported to tax in the foreign parent’s tax return (irrespective of exemption or relief available) will not be entitled to the exemption (FAQ #7). 


Definition of “Connected person” and “group”

Connected person: A natural or juridical person who is related to one or more juridical person(s) through direct or indirect ownership or control, or common control. 

Group: Not defined. 

Connected person: An entity forming part of the same group to which the licensee or the excluded licensee belongs. 

Group: Two or more entities related through ownership or control, such that they are required to prepare consolidated financial statements. 

KPMG comments

  • A natural person is no longer included in the definition of a “connected person”. This will have direct implications on relevant activity classifications that involve dealing with connected persons. For example, goods purchased from or services provided to a foreign shareholder will no longer trigger a distribution and service centre activity under ESR, pursuant to this definition change.
  • Furthermore, purchasing goods from or providing services to connected persons (entities) that are not consolidated at intermediate or ultimate parent level will not fall under a “group” definition and thus, would not constitute a relevant activity. This will have a direct impact on a licensee’s relevant activity classification that deals with related entities that are not consolidated (in case of headquarters business, distribution and service centre and high-risk IP business).


“Distribution business” definition

Purchasing from a foreign connected person and importing and storing in the state: component parts or materials for goods; or goods ready for sale, and reselling such component parts, materials or goods outside the state. 

Purchasing from a foreign connected person component parts or materials for goods; or goods ready for sale; and reselling such component parts, materials or goods. 


KPMG comments

  • The requirements to physically import and store the goods in the UAE, and export such goods, are absent. This potentially expands the scope of this relevant activity to include drop-shipment models.
  • Additionally, local sales of goods purchased from foreign group companies also appear to be within the purview of the definition.


‘Service Centre’ definition

Providing services to foreign connected persons in connection with a business outside the State. Providing services to foreign connected persons

KPMG comments

The requirement to provide services in connection with the business outside the state has been removed. This widens the ambit of the definition to include services provided to foreign connected persons in connection with their business in the UAE.


‘Holding Company Business’


The previous ESR included the following definitions:

a) Holding Company business:

  • a Holding Company in accordance with the law applicable to the Licensee carrying out such activity in the State.
  • has as its primary function the acquisition and holding of shares or equitable interests in other companies.
  • does not carry on any other commercial activity.

b) Holding Company:

Holding Company shall have the meaning as set out in the law governing such activity in the state.

The revised ESR does not contain the definition of a ‘Holding Company’, and a ‘Holding Company Business’ is defined now as one that:

  • Has as its sole function the acquisition and holding of shares or equitable interests in other companies; and
  • Only earns dividends and capital gains from its equitable interests.

KPMG comments

Under the previous ESR, based on the reference to the ‘applicable law in the state’, the meaning of holding companies could be derived from definitions under the UAE Commercial Companies law, or as per regulations issued by various free trade zone authorities which typically follow a majority control/management/ownership criteria for Holding companies. In the absence of references to such laws, it appears that having minority ownership in other entities arguably leads to the classification of an organization as a holding company.


Compliance during liquidation


The previous ESR were silent on this subject.

Licensees carrying out relevant activities will need to meet ESR compliance requirements even during the course of liquidation.

KPMG comments

Meeting substance tests amidst the winding-up process may be challenging. Special care will need to be taken to maintain adequate substance, commensurate with the relevant income, until the entity is eventually wound up.


Modifications in the contents of the ESR notification/ report

  • The erstwhile ESR does not require disclosure in the notification of the jurisdictions in which the Parent Company, Ultimate Parent Company and Ultimate Beneficial Owner claim to be tax resident. However, the guidance issued by the various RAs required High Risk IP licensees to disclose the aforementioned information in the notifications.
  • A copy of the Licensee’s financial statements is not required to be submitted along with the economic substance report.
  • All Licensees carrying out a relevant activity will now need to identify in their notifications/reports the jurisdiction in which the Parent Company, Ultimate Parent Company and Ultimate Beneficial Owner claim to be tax resident.
  • A copy of the financial statements must be submitted by the Licensees while submitting economic substance reports (if required to submit).

KPMG comments

  • There is an increased reporting burden. Licensees will need to revisit and amend internal information sharing policies, especially with regards to ownership.
  • While the requirement does not explicitly require audited financial statements, entities which do not prepare financial statements but carry out a relevant activity will need to consider how they comply with this requirement. Audited financial statements might be preferred by authorities and licensees on a prudent basis, and organizations should be prepared to provide them, if requested.


Notification timeline

No specified date; generic advice to adhere to respective RAs’ deadlines.


In the future, all notifications will need to be filed within six (6) months after the financial year-end, on to the MoF’s portal.

KPMG comments

Licensees that have already submitted a notification for the financial year ended 31 December 2019 directly to their RAs are required to re-submit a notification in accordance with the provisions of the new ESR on the MoF’s portal once it is available (expected in Q4 2020).



  • AED 10,000 to 50,000 for failure to meet the requirements of the tests in the first year
  • AED 50,000 to 300,000 for failure to meet the requirements of the tests in the second year
  • AED 10,000 to 50,000 for failure to provide information/provision of inaccurate information in the ESR notification/report
  • License annulment for persisted non-compliance
  • AED 50,000 for failure to submit report or failure to meet the requirements of the tests in the first year
  • AED 400,000 for failure to submit report or failure to meet the requirements of the tests in the second year
  • AED 50,000 for providing inaccurate information to the RA or FTA
  • AED 20,000 for failure to submit a notification
  • License annulment for persisted non-compliance

KPMG comments

The penalties for offences have been raised.


[1] MNE Group means any group that includes (i) two or more entities, the tax residence of which is in different jurisdictions or (ii) an entity that is resident for tax purposes in one jurisdiction and is subject to tax, with respect to the activities carried out through a branch or permanent establishment, in another jurisdiction.

Other key clarifications

  • Treatment of the branches is described in detail as follows:
  1. UAE branch of a UAE company: As branches do not have separate legal personalities from their parent or head office, branches registered in the UAE of a UAE parent entity must file a single notification and (if applicable) a single economic substance report in relation to the relevant activities of itself and all its UAE branches.
  2. Foreign branch of a UAE company: UAE licensees do not need to report and demonstrate substance in the UAE related to any relevant activities that its foreign branch(es) undertake, provided that the foreign branch(es) is subject to tax on all of its relevant income in the foreign jurisdiction.
  3. UAE branch of foreign company: UAE branches of a foreign entity are not subject to ESR, as long as all of their relevant income is subject to tax in the foreign parent/head office jurisdiction (with the FAQs clarifying that the income must be reported in the tax return of the foreign parent to satisfy the criteria) .
  • The updated Relevant Activities Guide, appended in the Ministerial Decision No. 100 of 2020, clarifies a key point on holding company owning real estate assets, i.e. real estate owned by a licensee that are solely used for purposes of its holding company business will not prevent such licensee from being considered as carrying on a holding company business. This clears the ambiguity caused by the earlier regulations under which holding companies were arguably excluded from the definition based on any other assets held, apart from its equity stakes.

Grey areas/information awaited

Below are some of the grey areas/pending items which still need to be addressed:

  • The relevant regulatory authority for licensees operating on the mainland that carry out a “lease-finance” business but are not under the jurisdiction of the UAE Central Bank.
  • The format of the new notifications and economic substance report.
  • The timeline as to when licensees should submit the additional information/documents requested by the Regulatory Authorities.
  • Basis and type of companies eligible for exemption under the MoF’s discretionary powers, as stipulated under Article 1 of Cabinet Resolution No.57, is not clarified. We would expect any specific entities or categories of entities to be clarified in due course.

Conclusion and next steps

The new regulations provide much appreciated relaxations for licensees in the UAE by offering exemptions for entity/branch profits already accounted for tax purposes in another jurisdiction and also the exemption extended to domestic businesses owned by residents, which arguably do not participate in any profit shifting. Pursuant to these changes, the UAE has become more aligned with the essence of BEPS and the OECD’s envisaged framework for an international tax system.

The revisions in the new regulations has also made the UAE more aligned with certain rules of the other ESR- enacting jurisdictions, for example:

  • The Cayman Islands also exempt Investments funds
  • The Cayman Islands and the British Virgin Islands (BVI) also exempt foreign tax resident companies
  • Majority of the jurisdictions have a similar distribution business definition, i.e. without the “importing and storing inside the state” condition
  • The Cayman Islands and Bahrain also grant exemption to domestic entities that have only local operations

Notwithstanding the welcome changes, the new regulations warrant certain immediate action points that need to be undertaken. All UAE licensees will need to re-visit their earlier ESR classifications in light of these new regulations and conclude how and whether they fall within the purview of the revised regulations and prepare for resulting compliance requirements accordingly.

The MoF will launch a portal to facilitate the electronic filing of notifications, economic substance reports and all other relevant information and documents. Information on the Portal, including the rules and procedures for use of the portal shall be published on the MoF’s website.

We would be pleased to assist you in your endeavor to be ESR compliant by assessing your business activities under the new regulations and providing support throughout navigating the ever-changing UAE regulatory landscape.