Substance after ESR: what UAE holding companies and family offices still need to show

The UAE’s economic substance regulations (ESR) no longer apply to financial years ending after 31 December 2022, following Cabinet Decision No. 98 of 2024. Substance is still tested, though, in four places. They are the adequate substance condition for Qualifying Free Zone Persons, the effective management and control test for company residence, access to tax treaties and tax residency certificates, and the anti-avoidance and controlled foreign company rules of other countries where the family has interests. A UAE holding company with no people, premises or decision-making in the UAE is exposed on all four.

What happened to the UAE economic substance regulations?

The ESR, introduced by Cabinet Resolution No. 31 of 2019 and replaced by Cabinet Decision No. 57 of 2020 (Ministry of Finance, ESR), required UAE entities carrying on certain relevant activities, including holding company business, to file notifications and reports and to show adequate substance. In October 2024 the Ministry of Finance announced that, following Cabinet Decision No. 98 of 2024, companies no longer file economic substance reports for financial years ending after 31 December 2022. Companies remain responsible for obligations from earlier years, including any outstanding filings, information requests and penalties (Ministry of Finance, 14 October 2024). Deloitte, summarising the decision as published in the Official Gazette, describes it as limiting the regulations to financial years from 1 January 2019 to 31 December 2022 (Deloitte, 17 October 2024).

The ministry’s stated reason was to let businesses focus on corporate tax compliance. In practice, corporate tax is now where substance questions are asked.

Where is substance still tested under UAE corporate tax?

Qualifying Free Zone Persons

A free zone person can only pay 0% on qualifying income if it maintains adequate substance in the free zone. The FTA’s Free Zone Persons guide requires the core income-generating activities to be carried out in the free zone, with adequate assets, an adequate number of qualified full-time employees and adequate operating expenditure for the level of activity. Outsourcing is allowed only to other persons in a free zone, and only with adequate supervision. What counts as adequate substance depends on the nature and size of the business (FTA guide CTGFZP1, s. 6.2). In our view, for a pure holding company that is mainly holding and managing investments and taking decisions about them, the core activities are lighter, but they still need to happen in the free zone with real people involved. See our article on Qualifying Free Zone Person rules.

Company residence

Under Article 11 of the Corporate Tax Law, a company is UAE resident if it is incorporated in the UAE, or if it is incorporated abroad but effectively managed and controlled in the UAE. The second limb catches foreign companies whose directors live in Dubai and take decisions there. The reverse also applies abroad: a UAE company whose directors meet and decide in London or Paris may be treated as resident there under local rules. Under a treaty such as the UK one, the two tax authorities then try to agree where it is resident, and without agreement it gets no treaty benefits. PBF’s article on place of effective management explains the test.

Tax residency certificates and treaties

A UAE company that wants to rely on a tax treaty usually needs a tax residency certificate. The FTA’s guide on tax residents and TRCs sets out the documents it expects, which go to whether the company is genuinely established and managed in the UAE. Treaty partners apply their own tests too, including the principal purpose test. The UAE signed the OECD’s multilateral instrument (MLI) on 27 June 2018, and it entered into force for the UAE on 1 September 2019 (OECD, MLI signatories and parties). For treaties that both countries have listed under the MLI, the principal purpose test in Article 7(1) of the MLI applies once the MLI provisions have taken effect for that treaty. The UAE’s MLI position, deposited on 29 May 2019, does not opt for the simplified limitation on benefits provision, and it chooses to apply Article 7(4), which lets a tax authority still grant treaty benefits the test would deny where they would have been granted without the arrangement. Article 7(4) applies only where the other country has chosen it too (UAE MLI position, Art. 7, p. 34; MLI, Art. 7; OECD peer review on treaty shopping, United Arab Emirates, 2021). In the UK and UAE treaty, for example, the dividend anti-abuse rule in Article 10(6) is replaced by Article 7(1) of the MLI (UK and UAE convention, synthesised text). A holding company with no substance may find that a foreign tax authority refuses treaty relief on dividends or gains. PBF covers TRCs for companies in more detail.

UAE anti-abuse rules

The general anti-abuse rule in Article 50 of the Corporate Tax Law lets the FTA counteract or adjust arrangements that are not entered into for a valid commercial or other non-fiscal reason reflecting economic reality, and whose main purpose, or one of whose main purposes, is a Corporate Tax advantage inconsistent with the law’s intention (Art. 50(1) to (3)). Substance is one of the ways a structure shows economic reality.

Where is substance tested outside the UAE?

Most families with a UAE holding company also have connections elsewhere, and those countries ask their own questions.

Many countries have controlled foreign company rules that tax a resident shareholder on the profits of a foreign company in a low-tax jurisdiction, often unless the company carries on genuine economic activity there. A UAE company paying 0% or 9% is exactly the kind of entity these rules examine.

Countries with exit and residence rules for individuals look at where a company is managed, because management by a resident individual can make the company resident too.

Large multinational groups within the Pillar Two rules face a minimum 15% effective rate, with a substance-based income exclusion calculated by reference to payroll and tangible assets (Cabinet Decision No. 142 of 2024, Annex Art. 18.1 (definition of Minimum Rate) and Annex Art. 5.3). Investment funds, real estate investment vehicles and certain entities they own (‘Investment Entities’) are dealt with separately: under the UAE rules an Investment Entity located in the UAE is not subject to the top-up tax at all, and an ordinary family holding company is not usually an Investment Entity (Cabinet Decision No. 142 of 2024, Annex Art. 2.3 and Art. 18.1 (definition of Investment Entity)). The UAE domestic minimum top-up tax applies for financial years starting on or after 1 January 2025 to multinational groups with global revenues of EUR 750 million or more in at least two of the four preceding financial years (Ministry of Finance, Top-up Tax).

What does good substance look like for a family holding company?

There is no single standard, because the right level depends on what the company does. For a typical family holding company in the UAE, the evidence we look for includes:

• a board with at least some directors resident in the UAE who understand the investments;
• board meetings held in the UAE, with agendas, papers and minutes that show real decisions;
• bank accounts operated and payments approved from the UAE;
• office premises appropriate to the activity, which may be modest for a holding company;
• employees or a supervised service provider in the UAE for the work the company does;
• records kept and accessible in the UAE;
• consistency between the company’s documents and what happens in practice, including where the principal signs contracts.

The last point is where most structures fail. A company can have impeccable minutes and still be managed by a principal who decides everything by email from another country.

How should a family check its structures?

Start with a list of every company, where it is incorporated, where its directors live, where its board meets and who actually decides. Compare that with what each company claims for tax purposes: UAE resident, Qualifying Free Zone Person, treaty resident, or resident somewhere else. Mismatches are the risks. In many families the person who owns this list is a fractional head of tax. The list changes whenever a director moves, a board meets abroad or the principal starts signing from another country, so someone needs to hear about those changes as they happen, not once a year.

Within, by PBF, is fractional tax advisory: your tax team, within your business. A senior tax team works as part of your family office or group, alongside your accountants, lawyers and trustees, and gives you one owner for substance and the ongoing compliance around it, with PBF’s specialists brought in where a project needs them. See how Within works.