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Who is a Licensee Under ESR?

Who falls under ESR in UAE?

The Economic Substance Regulations (ESR) were introduced in the United Arab Emirates (UAE) in 2019 to meet the requirements of the Base Erosion and Profit Shifting (BEPS) initiative of the Organization for Economic Cooperation and Development (OECD). The ESR aims to ensure that companies conducting certain types of activities in the UAE have a substantial economic presence in the country and do not engage in profit shifting or base erosion.

One of the key aspects of the ESR is the concept of a “Licensee”. In this article, we will explore who qualifies as a Licensee under the ESR.

Definition of a Licensee

Under Article 3 of the Ministerial Decision No. 100 of 2020

According to Article (1) of the ESR Regulations, a Licensee is described as follows:

A Licensee is an entity that falls under one of the following categories:

  1. A juridical person, which refers to a corporate legal entity incorporated within or outside the State, having a distinct legal personality separate from its owners.
  2. An Unincorporated Partnership, that encompasses various forms of partnerships operating in the UAE without having a separate legal personality. These partnerships are specifically identified under the ESR Regulations.

It’s important to note that branches registered in the UAE are considered extensions of their “parent” or “head office” and, as such, do not possess separate legal personalities.

Similarly, if a branch of a foreign entity is registered in the UAE and engages in a Relevant Activity, it must comply with the ESR Regulations unless the Relevant Income generated by that branch is subject to taxation in a jurisdiction outside the UAE.

In cases where a UAE entity conducts a Relevant Activity through a branch registered outside the UAE, the UAE entity is not obligated to consolidate the activities and income of the branch for ESR Regulations purposes. This exception applies as long as the Relevant Income of the branch is subject to taxation in the foreign jurisdiction where the branch is located. It’s worth mentioning that a branch, in this context, may include a permanent establishment or any other form of taxable presence for corporate income tax purposes, but it is not considered a separate legal entity.

Exempted Licensees under ESR

Exempted Licensees refer to entities that are excluded from the requirement to undergo the Economic Substance Test as per the ESR Regulations.

Under the ESR Regulations, an Exempted Licensee includes any of the following entities registered in the UAE which engage in a Relevant Activity:

(a) Investment Funds;

(b) Entities that are tax residents in jurisdictions other than the UAE;

(c) Entities that are wholly owned by UAE residents and meet the following conditions:

(i) The entity is not part of a Multinational Enterprise (MNE) Group;

(ii) All of the entity’s activities are exclusively conducted within the UAE;

(d) Licensees that are branches of foreign entities whose Relevant Income is subject to taxation in a jurisdiction other than the UAE.

What the Relevant Activities of the licensees are as stated in the resolution?

Article 3 of the ESR Regulations outlines various activities that are considered Relevant Activities, including:

  • Banking Business
  • Insurance Business
  • Investment Fund Management Business
  • Shipping Business
  • Lease-Finance Business
  • Distribution & Service Centre Business
  • Headquarters Business
  • Intellectual Property Business
  • Holding Company Business

Regardless of whether a Relevant Activity is explicitly mentioned in an entity’s trade license or permit if it is determined to be undertaken in substance, the entity will be considered a Licensee under the ESR Regulations.

When a Licensee conducts a Relevant Activity, they must review and comply with the specific requirements applicable to that activity under the ESR Regulations. For example, holding companies that solely hold equity participation in other entities and do not engage in any other Relevant Activity are subject to reduced substance requirements. Conversely, Licensees generating income from high-risk Intellectual Property Assets (High-Risk IP Licensees) are subject to increased reporting requirements and a higher evidentiary threshold in the Economic Substance Test.

It is important to note that an entity does not need to be actively involved in the mentioned business categories to be considered as carrying on a Relevant Activity. Passive income derived from a Relevant Activity is sufficient to bring the entity within the scope of the ESR Regulations.

 Obligations of a Licensee

Under the ESR, a Licensee is required to demonstrate that it has a substantial economic presence in the UAE and that its activities in the country are not primarily aimed at avoiding tax in another jurisdiction. To meet this requirement, a Licensee must satisfy the following criteria:

  1. Directed and managed in the UAE: The Licensee must have an adequate number of qualified employees, physical assets, and premises in the UAE to conduct its Relevant Activity. It must also demonstrate that its board of directors or senior executives regularly meet and make strategic decisions in the UAE.
  2. Conducts core income-generating activity in the UAE: The Licensee must carry out the core income-generating activities related to its Relevant Activity in the UAE. For example, if the Relevant Activity is banking, the Licensee must carry out its lending, deposit-taking, and other core activities in the UAE.
  3. Adequate operating expenditure and physical presence in the UAE: The Licensee must have an adequate level of operating expenditure in the UAE relative to its Relevant Activity and have a physical presence in the country that is commensurate with the level of its activity.

If a Licensee fails to meet these criteria, it may be subject to penalties, including fines and suspension or revocation of its license.


In summary, a Licensee under the ESR is a legal entity that is licensed by a regulatory authority in the UAE to carry out one or more Relevant Activities. A Licensee must satisfy certain economic substance requirements to demonstrate that it has a substantial economic presence in the UAE and that its activities in the country are not primarily aimed at avoiding tax in another jurisdiction.

If you are a Licensee under the ESR, it is important to ensure that you comply with the relevant requirements to avoid penalties and maintain your license. It may be useful to seek professional advice to understand your obligations and to implement appropriate measures to meet them.