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4 Steps to Ensure Economic Substance Compliance in the UAE

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The United Arab Emirates (UAE) has implemented economic substance regulations to ensure that companies operating in the country demonstrate real and substantial business activity. These rules apply to entities in specified sectors that earn income from certain sources.

Businesses must comply with defined tests and extensive reporting requirements annually. Failure to do so can result in major fines or disruption to operations.

This 4-step guide covers the key aspects you need to know to maintain compliance.

Step 1: Determine if Your Company Must Comply

The first step is to ascertain if your business falls under the economic substance regulations. The rules generally apply to:

Companies engaged in banking, insurance, investment fund management, headquarter operations, shipping, leasing, intellectual property and other defined activities.

Legal entities that generate income from intellectual property assets, distribution and service centers, leasing and licensing, banking, insurance, shipping, fund management or headquarter activities.

Businesses that meet specific thresholds related to annual turnover, gross income or expenditures. For example, banking income over AED 3.5 million or lease/IP income over AED 7 million.

Exceptions exist for wholly owned UAE subsidiaries, investment funds, tax exempt non-profits, and branches of foreign companies.

Check the latest guidelines from the Ministry of Finance to confirm if your company’s sector, income type and thresholds mandate compliance.

Step 2: Understand the Economic Substance Tests

If your business is in scope, you must comply with three clearly defined economic substance tests:

1. Directed and Managed Test

This test requires proof that strategic decisions and management activities related to core income generating functions are occurring with adequate frequency in the UAE.

Specifically, board meetings must take place in the country.

Over half the directors must be UAE residents with necessary qualifications and authority to guide key business decisions.

Maintain records of meeting minutes, corporate records, directors’ authority levels and decision making processes to satisfy this test.

2. Core Income Generating Activities (CIGA) Test

Companies must show they conduct main business revenue earning activities inside the UAE.

The specific activities differ based on the organization’s sector. For example:

Banks must undertake raising capital, managing risk, taking deposits or providing loans locally

Insurers must perform underwriting, claims management or policy sales from within the country

Keep detailed records of CIGA conducted in the UAE with documented procedures, premises, systems and staff.

3. Adequate Expenditures, Assets and Employees Test

Entities need to demonstrate an appropriate level of expenditures, assets, and UAE employees that align with their core activities.

Expect regulators to assess adequacy levels based on the type, size and scale of your business operations. Larger firms must typically show higher in-country expenditures and staff counts.

Track expenditures connected to local office space, equipment, service providers and payroll to prove adequate in-country spending levels.

Documenting proper evidence to satisfy all tests requires coordination across finance, compliance, HR and other functions.

Step 3: Submit Detailed Reporting

To comply with regulations, companies must submit extensive reporting before the end of December annually.

Filings require data on income types, expenditures, staffing, governance systems and core activities tied specifically to operations in the UAE.

Reports must be submitted through the Ministry of Finance online portal. You will need to register an account, provide details on the entity and its activities, and disclose the economic substance evidence.

Work closely with your accountant or advisor to compile accurate records and complete rigorous reporting properly before the deadline.

Step 4: Assess Compliance Risks and Penalties

Expect detailed scrutiny of your regulatory submission by authorities. They will thoroughly evaluate if your business has satisfied all economic substance tests and reporting requirements.

You risk fines up to AED 50,000 for failing specific tests.

Submitting inaccurate or incomplete information can lead to penalties up to AED 300,000.

The regulators may also apply additional ongoing fines or other disciplinary action for continued non-compliance.

Ultimately, authorities can seek to suspend, dissolve or strike off non-compliant entities.

Avoid these consequences through meticulous compliance.

Key Takeaways

Stay current on economic substance regulations. Identify if your company is in scope based on sector, income and thresholds. Maintain rigorous records all year to satisfy the directed and managed, core activities and adequate expenditures tests. Prioritize accurate reporting before annual deadlines to minimize compliance risks and penalties.


The UAE’s economic substance regulations aim to attract substantive business investment and operations to the country across sectors. Keep track of updates to the rules and requirements issued by various authorities. Seek guidance to ensure correct interpretation and compliance. With concerted planning, governance, documentation and reporting, meeting regulatory expectations is very feasible.


Q: Are all free zone companies exempt from the rules?

A: No. Only certain categories like wholly owned UAE business are exempt. Even entities in financial free zones must comply based on income and sector.

Q: We are tax resident overseas but have a registered subsidiary in the UAE. Do the rules apply?

A: Yes. UAE registered subsidiaries must determine their compliance duties based on activity and income thresholds set out in the latest guidelines.

Q: Our parent company manages most core activities outside UAE. Does this exempt our entity?

A: No. Companies registered and operating in the UAE must satisfy economic substance tests within the country, irrespective of where parent companies are located.

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Pranav Modi

Mr. Pranav Modi, CA is supported by 12+ years of Consulting, Auditing and Accounting practice across diverse sectors.

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