The United Arab Emirates (UAE) has published revised legislation overhauling its Economic Substance Regulations (ESR). The ESR were introduced last year, with 2019 being the first reportable year for all UAE based entities (companies, branches and commercial license holders included).

This 2020 overhaul addresses specific aspects of the ESR. UAE-based entities which are covered by the ESR are taking note of these changes ahead of the first ESR Report filing deadline: December 31, 2020.


The UAE introduced the ESR on April 30, 2019, through Cabinet of Ministers Resolution No. 31 of 2019. This was followed by specific guidance on those regulations issued by the UAE Ministry of Finance (MOF) on September 11, 2019, through Ministerial Decision 215 of 2019. We’ve discussed the ESR and related issues in these alerts: UAE removed from EU blacklist thanks to Economic Substance Regulations; Coronavirus: Impact of travel restrictions on UAE corporate governance and economic substance; and UAE economic substance - self-assessment notification deadline fast approaching.

On August 10, 2020, the Cabinet of Ministers formally adopted Resolution No. 57/2020, repealing and replacing the initial Resolution No. 31 of 2019. Resolution 57/2020 was made public on September 2, 2020. Further, a renewed Ministerial Decision 100/2020 was adopted on August 19, 2020 and also made public on September 2, repealing and superseding the initial Decision 215 of 2019. The changes these resolutions bring are discussed below.

Changes to the ESR

Resolution 57/2020 has made the following changes to the original ESR. Exempted licensees have been introduced as a new category of licensee under the ESR and include, among others: (i) investment funds, (ii) licensees which are tax resident in another jurisdiction, and (iii) branches of foreign entities which (relevant) income is subject to tax in a jurisdiction outside the UAE. In order to enjoy their exempt status for ESR purposes, exempted licensees need to file a notification and provide documentary evidence demonstrating such position.

The UAE Federal Tax Authority (FTA) has now been appointed as the authority to (i) assess whether licensees have met the economic substance tests; (ii) impose administrative penalties for non-compliance; and (iii) hear and decide on appeals filed by licensees, among others. Most of the aforementioned powers were previously in the hands of the regulatory authorities of each licensee, which include the relevant UAE Free Zone Authorities and the Ministry of Economy, among others.

With respect to administrative penalties for non-compliance, Resolution 57/2020 has increased the relevant amounts. The penalty for failure to submit the ESR Notification, which most licensees had to do before June 30, 2020, has been increased from US$2,725 to US$5,450, while penalties for failing the economic substance test have now been set at US$13,625 instead of the previous range, which was between US$ 2,725 to US$13,625.

Relevant activities and sufficient economic substance

The new Resolution 57/2020 entails some minor changes to what the ESR considers relevant activities and what licensees performing such activities must demonstrate in terms of sufficient economic substance in the UAE. This includes, among others, further clarifications relating to the relevant activities of a distribution and services business and a high-risk IP business. As such, licensees that submitted the ESR Notification in June and are now preparing for the ESR Report filing before the end of this year would do well to consider the relevant changes.

ESR reporting mechanism

Under the previously applicable ESR, the notifications, reports and related documentation had to be submitted by licensees with their respective regulatory authority. Decision 100/2020 now clarifies that the UAE MOF will launch a portal to facilitate the electronic filing of the notifications, reports and other relevant information. The Decision does not state when this portal will be accessible.

Key takeaways

The ESR which applied from last year has undergone important changes, especially on reporting by licensees and the roles and responsibilities of the various UAE authorities under the ESR. Now that enforcement tools, such as the imposition of penalties, have been shifted to the UAE FTA, a strict policy against non-compliance may be expected. The first deadline for submitting the ESR Reports - December 31, 2020 – is approaching. Businesses would do well to consider these recent changes.