Under Cabinet Resolutions (31) of 2019, (7) of 2020, and (57) of 2020, UAE legal persons operating in certain sectors with relevant income must meet requirements related to the level of core business activities that they carry out in the UAE (the Economic Substance Test). All firms conducting any of the following activities must pass the annual Economic Substance Test:

In order to pass the test, these firms are required to make an annual report, the Economic Substance Report, to their registrar showing that they in fact carry out core income-generating activities within the UAE, that these activities are directed and managed from the UAE, that the firms maintain an appropriate number of employees, and that the firms have appropriate physical premises. The report is then reviewed by the Federal Tax Authority, which makes a determination as to whether the criteria for economic substance have been satisfied. The Economic Substance Report is not currently available to financial institutions directly, but LFIs may request an attested copy of the Report from their customer or prospective customer.

The Economic Substance Test could help reduce the likelihood that UAE companies in these sectors are shell companies. The Economic Substance Test is retroactive, however, with companies required to submit Reports at the end of the twelve-month period in which the qualifying activity took place. In addition, Reports may not be promptly reviewed. LFIs should not rely on a customer’s assertion that it has passed the Economic Substance Test and must conduct appropriate customer due diligence, as discussed in section 4.3 below. This may include requesting the customer’s Economic Substance Report from the customer itself.