Why The UAE is the best jurisdiction for substance requirements

2 April 2020

What does substance mean?

The term ‘tax substance’ or ‘economic substance’ refers to the requirement of an entity to have a physical economic presence in the jurisdiction it is established to qualify for the benefits of a tax treaty.

Guidance and requirements provided by the EU and OECD provide three requirements on a resident entity that undertakes relevant activity to demonstrate economic substance. These guides were put in place to avoid illegal activity such as money laundering and tax evasions. The UAE is currently on the White List, enabling easy, flexible banking globally.

1. Directed and Managed

The entity, company or business will need to be adequately managed and directed in the jurisdiction with regards to relevant activity.

This includes documenting all board of director meetings, keeping minutes of all meetings in the jurisdiction and the directors having necessary knowledge and expertise.

2. Core Income Generating Activities

The entity, company or business will need to provide core income generating activities evidence having been undertaken in the jurisdiction.

The Regulations require UAE onshore and free zone companies and other UAE business forms that carry out any of the “Relevant Activities” listed below to maintain an adequate “economic presence” in the UAE relative to the activities they undertake.

Relevant activities:
  • Banking Business
  • Insurance Business
  • Investment Fund management Business
  • Lease - Finance Business
  • Headquarters Business
  • Shipping Business
  • Holding Company Business
  • Intellectual property Business (“IP")
  • Distribution and Service Centre Business
For more information on relevant activity visit here.

3. Being Adequate

The entity, business or company will need to have an adequate number of qualified employees and an adequate physical presence in the jurisdiction e.g. office space.

Why the UAE?

The UAE is one of the best jurisdictions as it is one of the easiest to comply with in terms of substance.

Onshore companies

Due to the requirements of having an Emirati in the structure of an onshore company, onshore companies automatically have substance when it comes to the directed and managed requirement. They also automatically have residence here due to the UAE national.

The UAE is an ideal jurisdiction to grow companies due to an abundance of bilingual talent and easy to rent office facilities.

Free Zone companies

Free zone companies cannot interact in the local market the same way a local company can however they do allow 100% foreign ownership. Incorporation of a company in an UAE free zone grants residency for owners and their families, making it easy to relocate. In fact, residency in the UAE is one of the easiest to obtain and maintain in the world (the only condition of a UAE residence is that you have to travel to the country once every 180 days).

By gaining residency as a free zone company owner you are compliant with the directed and managed substance requirement. The ease of office leasing and talent also makes it easy to have substance in other required areas.

Commercial activities for free zone companies include real estate, airlines, financial services and tourism.

For more information on license for free zone activities visit here.


In order to comply with substance as an offshore company, offshore companies need to be registered with a local agent – something which SFM provides as a service when you incorporate a company with us. This allows companies to have a physical presence within the UAE.

Offshore companies can benefit from the UAE’s zero tax and are ideal for holding activity, trading activity, consultancy activity, real estate, IT and professional training activity.

Financial, forex, insurance, medical and educational activity are all restricted in an offshore company in the UAE.

The main benefits of a UAE company

Other jurisdictions have very similar substance requirements however once a company is compliant, they are often subject to tax in the jurisdiction. Companies and individuals in the UAE are not subject to tax, which is one of the main attractions of incorporating a company in the UAE.

As mentioned previously the UAE is great for banking transactions (Whitelist), having and abundance of talent, competitively priced office space options and cheaper running costs in the long run, due to tax.

For more information on onshore, free zone or offshore company formation in the UAE Contact SFM today.
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