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Economic Substance Requirements in the UAE for DAFZ Entities


As a member of Organisation for Economic Development and Cooperation (“OECD”), and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group, the UAE has committed to ensuring standards related to Base Erosion and Profit Shifting (“BEPS”) are implemented.

On 30 April 2019, the UAE enacted the Economic Substance Regulations (“ESR”) through Cabinet Resolution No. 31, which apply across the whole of the UAE, both onshore and Free Zones, including the Dubai Airport Free Zone (“DAFZ”).

Economic Substance for DAFZ entities

The Dubai Airport Free Zone Authority (“DAFZA”) has issued circular on ESR applicable to all companies and branches operating in DAFZ (“Licensees”). The ESR, which apply to financial years commencing on or after 1 January 2019, mandate DAFZ entities that undertake a “Relevant Activity” to demonstrate “Economic Presence” in the UAE in relation to the activities they undertake.

The ESR apply to all DAFZA Licensees that earn income from one or more Relevant Activities. Relevant activities being Banking, Insurance, Investment fund management, Leasing, Headquarters, Shipping, Holding, Intellectual Property, Distribution and Service Centre Businesses.

As per the circular issued by DAFZA, in order to determine whether a Relevant Activity is taking place, a substance over form approach should be followed.  This means looking beyond what is stated on the commercial license to what activity is being undertaken by the entity.

Licensees in which the UAE federal government, the government of any emirate, or any UAE federal or emirate-level governmental authority or body holds at least 51% direct or indirect equity ownership are not subject to the ESR.

Please note it is important to analyse and conduct an impact assessment of the businesses activities in order to determine whether the business falls under the purview of ESR in the UAE.


Economic Substance Test for DAFZ entities:

In order to meet the Economic Substance Test, DAFZA Licensees need to demonstrate all three of the following conditions:

  • Adequate employees, physical assets and expenditure in the UAE
  • Core Income Generating Activities (“CIGAs”) are undertaken in the UAE
  • Directed and managed in the UAE


Next Steps for DAFZ entities:

Following the recent circular issued by DAFZA, all DAFZ entities are required to file a notification via DAFZA’s online CRM portal by 3 May 2020.


ESR Return/ Report Deadline – 31 December 2020

  • Return/ Report filing requirement applies to DAFZA Licensees that undertake a Relevant Activity  
  • DAFZA Licensees that undertake a Relevant Activity during financial year ended 31 December 2019 must submit the Return/ Report by 31 December 2020 i.e. 12 months after the financial year end
  • Portal for the ESR Return is not currently available, DAFZA will provide separate announcement once the return is ready on DAFZA’s CRM portal

Penalties for Non-Compliance

  • Failure to comply with the ESR (including providing inaccurate or incomplete information) may result in fine of between AED 10,000 and AED 50,000 in any fiscal year for a failure to demonstrate an actual economic activity. The fines increase to between AED 50,000 and AED 300,000 for the subsequent fiscal year.    
  • DAFZA will notify the UAE entity as to the reason of failure to meet the economic substance requirements. If not corrected, DAFZA will ultimately be able to suspend or terminate the license of the DAFZ registered entity.

How GT can assist:

In this regard, the tax team at GT is extending its support to all businesses in conducting:

  • Economic Substance Impact Assessment for UAE entities
  • Assistance in Filing Economic Substance notification
  • Assistance in Filing Economic Substance Return/ Report with DAFZA


For further clarification and details regarding the above Tax Alert, please feel free to contact Steven Ireland (Director) and Amisha Anil (Assistant Manager).