Legislation on Economic Substance
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Economic Substance
Explained
INTRODUCTION TO ECONOMIC SUBSTANCE 
ECONOMIC SUBSTANCE LEGISLATION CAME INTO EFFECT 
IN THE UNITED ARAB EMIRATES ON 1 JANUARY 2019.  
Economic Substance
Introduction
The Economic Substance legislation is the corner stone of optimizing income streams from economic
activities. This localized financial activity encourages offshore jurisdiction in low tax regimes. The law
is applicable to certain licensed financial activities in each jurisdiction and is not a blanket legislation.
Our team is happy to 
The relevant entities are bound to adhere to strict regulations that enunciate working conditions like 
recruiting adequate skilled employees to ensure that ‘core income generating activities’ are smooth. assist you in 
The revenue and margins are a part of the exercise.  understanding how 
  the new substance 
The jurisdiction in UAE is strategized in two layers. The two stages are key to establish the impact on legislations impact 
the company by the legislations are: your business.
 
• The company should be in the purview of the new legislation. This signifies that the licensee is 
            engaged in a relevant revenue grossing activity.
• The business entity should meet the substance requirements.
This document aims to act as a manual to designate the new substance laws in the UAE and 
demonstrate how IMC can enhance the customer delight by handling requirements and concerns in 
this domain.
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Which Entities 
Are To Be 
Affected? 
The legal entities in the UAE are the 
ones that are licensed to conduct 
business in the UAE. It should be 
noted that there cannot be any 
government holding in the entity’s 
shareholding pattern and the entity 
should be engaged in relevant 
activity. 
 It should be noted that a Company An entity is a licensee if it is
in which there is more than 51% 1. Licensed to carry out business in UAE
direct or indirect government 2. Conducts Relevant Activity
ownership would not be 3. Is not a commercial company with government 
considered under this Regulation. holding in its share capital
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State Core Income Generating Activity
State Core Income Generating Activities  Are To Be Pursued In The Jurisdiction To Demonstrate Substance. 
SOME EXAMPLES INCLUDE:
RELEVANT ACTIVITY EXAMPLES OF CORE INCOME GENERATING ACTIVITY 
Banking business 1. Initiating infusion of funds, managing risk, managing credit, currency as well as the interest risk 
2. Taking suitable hedging positions 
3.  Issuing loans, providing credit and a multitude of other financial services.
4. Managing the capital and preparing returns and reports , issuing  the same to the investors or to the local authorities 
Distribution and the service 1.  Transportation  and  storage of  goods, multiple components and materials 
centre business 2.  Stock Management 
3.  Order management 
4.  Consulting services and other administrative services 
Financing and leasing business 1. Negotiating  and optimizing funding terms and conditions
2. Identifying  and acquiring assets that are to be leased 
3.  Finalizing the terms of leasing and financing 
4.  Managing and revising the financing terms or leasing agreements. Risk Management of the afore mentioned agreements. 
Fund management activity 1.  Decision making on purchase and sale of investment instruments. 
2.  Calculation of risks and reserves .
3.  Comprehending currency volatility and aligning hedging positions.
4.  Reports or returns created and provided to investors and local authorities when mandated. 
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State Core Income Generating Activity
RELEVANT ACTIVITY EXAMPLES OF CORE INCOME GENERATING ACTIVITY 
Headquarters business 1. Making relevant management decisions 
2. Making decisive expenses as deemed necessary by all entities in the group. 
3. Coordinating and managing the activities of the group. 
Holding company business 1. Companies that hold equities in totality need to adhere to compliance with all relevant requirements under the jurisdictional law 
under which incorporation was initiated. 
2. Compliance is required for all holding companies to be able to conduct all relevant activities.
Insurance business 1. Risk calculation and prediction. 
2. Issuance od insurance and reinsurance  of risk. 
3. Local authorities and investors are provided with reports or returns as required. 
Intellectual property A. In the case where  intellectual property asset is considered a 
business 1. Patent or a similar asset , conduit for research and development  
2. Branding, marketing and distribution along with trademarking. Non-trade or intangible assets are inclusive. 
B. In exceptional cases,  unless the relevant  business activity is a potentially high risk intellectual property entity, the  multiple 
different core income generating activities that are relevant to  business and  intellectual property assets are inclusive of
1. Strategic decision making, managing, and bearing) the major risks related to development and  consequent exploitation of 
the purported intangible asset generation.
2. Carrying on the  basic trade activities  by which the intangible assets are  used to generate  income from third parties. 
Shipping business 1. Managing crew by means of hiring, overseeing  and paying crew members 
2. Overhauling and maintenance of ships 
3. Tracking deliveries and general management including overseeing operations.
4. Order management, deliveries, organizing and overseeing voyages as a whole
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Measureme
nt And Whether the 
entity is 
Reporting conducting 
relevant 
Subs anc  Whether the activityEstablishing that an entity is the licensee to carry out relevant 
relevant activity described by economic substance act activity is 
regulations, and duly notified to the relevant authority subject to tax 
in a separate 
The Company must pass the ‘Economic Substance Test’, jurisdiction
and based on which file and Annual Return
The Relevant Authority 
At the end needs to be notified 
of the about the following 
financial details:
year
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Measureme
nt And It is fully managed and There exists physical 
duly directed in the office that is 
Reporting jurisdiction operational. 
SAn euntityb carrsyingt ouat a rnelevcant eactiv ity 
will generally meet the substance 
requirements if these conditions Core Income  There are suitably qualified 
are in place: generation Activities employees in the requisite 
are  carried out in the number required for the 
valid jurisdiction activity in hand in the 
jurisdiction 
There are further detailed criteria 
especially around the Core Income 
Generating Activities.  They are accompanied by the and rules 
governing outsourcing. ‘High-risk IP companies’ are Adequate operating 
bound by special regulations. Please contact your usual expenditure is maintained 
IMC executive to discuss how these regulations in accordance to the 
impact your business entities. Once the substance is established, relevant activity.
the business entity is bound to file an economic substance report every  
year with the relevant authority in its jurisdiction. 
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Penalities For 
Non-compliance 
Non-compliance with the Regulations may lead to administrative fines and sanctions which include: 
A fine of up to AED 300,000 for failing to 
A fine of up to AED 50,000 for failing to 
meet an economic substance test in 
meet an economic substance test
respect of a financial year after an initial 
notice of failure
Sharing of information regarding the non-
compliance with tax authorities in the foreign states Suspension, revocation or 
where the affected companies are incorporated or in non-renewal of a licence.
which their parent company, ultimate parent or 
ultimate beneficial owner are resident; and,
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HOW CAN IS THE BUSINESS ENTITY IN QUESTION WITHIN SCOPE OF THE NEW LAW? 
IMC HELP? 
 The experts at IMC can provide the requisite 
professional non-legal advice to help clients identify 
the relevant entities to conduct relevant activities. 
IMC is a leading cross border advisory firm specializing in the AMEA (Asia, Middle East, Africa) region established in 1979. 
The firm has extensive knowledge and experience in gathering and reporting company data in the UAE. Additionally the 
robust networking in the region and deep experience in dealing with new regulations across regions covered by the group, 
IMC is uniquely placed to help it’s  clients understand and respond to this new legislation.
Substance determination is divided into three stages, and  the outcome of each stage determines the subsequent reaction. 
IMC applies the following approach to dealing with necessary substance requirements. 
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HOW CAN 
IMC HELP? 
How can the business entity enhance 
its substance? 
Does the business entity meet the Solutions may be straightforward for 
necessary substance requirements? standard structures including additional 
corporate services or Company 
Sectretarial activities. More complex 
IMC  experts perform a substance structures require the development and 
test on the entities in scope that implementation of customized solutions 
includes a request to garner that include consideration of functions 
additional information from the that IMC can facilitate adequately.
clients. The substance requirements 
may differ depending on the nature 
of relevant activity performed by Submissions of notifications and 
the entity. The examination includes reports 
a gap-analysis to gauge the 
requirements for adequate control, In scope entities are required to file a 
personnel, operational facilities and notification with the relevant authority. 
expenditure. IMC can ably assist in the requisite 
preparation and submission of the 
notification and report in the format 
that is required by the relevant tax 
authority. 
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Firm
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