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UAE: “Substance over form” approach for economic substance

UAE: "Substance over form" approach, economic substance

The UAE Ministry of Finance on 15 April 2020 released guidance in the form of a “relevant activity guide” that stipulates that UAE entities must adopt a “substance over form” approach in assessing the applicability of economic substance requirements.


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The guidance stipulates that the “substance over form” approach requires UAE entities to take into consideration all activities they have performed, irrespective of the ones stated on the respective business licenses issued by UAE licensing authorities (e.g., concerning a free trade zone). When a company (licensee) undertakes multiple relevant activities during the financial period, it will be required to demonstrate substance for each relevant activity, unless the activity is considered ancillary to the main relevant activity (materiality test). In certain circumstances, consolidated reporting of ancillary activity could prevent duplicate reporting and, subject to the specific facts, could be plausible for banking, lease-finance, headquarters, and distribution and services center operations.

An actual undertaking of a core income-generating activity test and a requirement of key decision-makers of the core income-generating activity test are some of the highlights of the relevant activity guide.

KPMG observation

The guidance seems to suggest that demonstration of economic substance for a particular economic activity is required only if any gross income was generated from such economic activity during the financial period, regardless of the way the income was realized.


An “economic substance” requirement for all UAE entities was introduced in 2019. For these purposes, economic substance can broadly be considered to consist of employees, premises, management, and costs. There are also various regulatory filing requirements that need to be met in order to comply with the regulations.

The UAE economic substance rules were issued, in part, as a response to European Commission concerns that resulted in the UAE being added to the EU’s list of non-cooperative tax jurisdictions. The rules also may be viewed as further aligning UAE’s legislative framework to the standards set out in the OECD base erosion and profit shifting (BEPS) project.

Read an April 2020 report prepared by the KPMG member firm in the UAE

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