Economic Substance Regulations

Economic Substance Regulations require UAE entities carrying on a Relevant Activity to demonstrate adequate substance in the country. The nine Relevant Activities are banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding company, intellectual property, and distribution and service centre. An entity carrying on one of these must file a notification within six months of the end of its financial period, and where it earned income from that activity, a full economic substance report within twelve months.

Most trading and consultancy companies are outside the regime entirely, which is why it is widely ignored — and why the holding company category catches so many people. A UAE company whose only asset is a shareholding in another company is a holding company business for these purposes, regardless of how it was described at incorporation and regardless of whether it does anything. The substance requirements for a pure equity holding company are reduced relative to the other activities, but the notification obligation is not, and it applies even where no income arose. That combination — an obligation on an entity that does nothing — is exactly how these deadlines get missed.

Thresholds and deadlines

Relevant Activities

Nine, defined — most trading and consultancy is outside

Notification

Within 6 months of the financial period end

Report

Within 12 months, where income was earned from the activity

Holding companies

In scope, with reduced substance requirements

Substance test

CIGA in the UAE, directed and managed here, adequate people and premises

Penalties

For failure to notify, failure to report, and failure to meet the test

1. Test each entity against the nine activitiesEntity by entity, not group by group. A dormant holding vehicle is assessed on its own.
2. File the notification within six monthsWhether or not income arose. This is the obligation most commonly missed.
3. Where income arose, prepare the reportWithin twelve months, evidencing core income-generating activities carried out in the UAE.
4. Evidence direction and management hereBoard meetings held in the UAE with directors physically present, minuted, with the necessary expertise.
5. Match people and premises to the incomeAdequate is assessed relative to the activity and the income earned, not against an absolute standard.

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