Examining the Impact of Economic Substance Regulations on Intellectual Property Businesses in the UAE

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The Economic Substance Regulations were issued by UAE to ensure that companies maintain and demonstrate an adequate “economic presence” in the UAE. The regulation applies to UAE-based businesses, including those in free zones, and those engaged in the relevant activities as specified in the regulations. Out of the nine relevant activities one is the Intellectual Property Business, which is a business that holds, exploits, or receives income from the Intellectual Property Assets. In this article, we will examine the impact of ESR on IP businesses in the UAE to ensure compliance with the requirements of the regulations.

Impact of ESR on IP Businesses

IP companies in the UAE lack the essential ESR requirements, and the parent company uses these. The company has to prove that it has adequate staff in the UAE office and demonstrates the relevant activities in which the reasons for using the IP are clearly stated. This requirement ensures that IP businesses have a substantial economic presence in the UAE. 

  • ESR Requirements for IP Businesses

Under the ESR, IP businesses have to meet the following requirements:

  • Carry out primary revenue-generating operations pertaining to the UAE’s exploited intellectual property.
  • Hold board meetings in the UAE with a quorum of directors, document strategic decisions made, and keep local minutes and records to ensure the firm is directed and managed locally.
  • Employ a sufficient number of qualified workers in proportion to the activity level in the United Arab Emirates, pay operational expenses, and keep sufficient physical assets.

Assets of an IP business may be eligible for an ESR exemption if they are only held by the UAE entity and are not being actively used. Moreover, the parent company can reduce its tax liability in its home country by establishing an IP Holding Company in the UAE to hold IP rights.

  • Core Income Generating Activity for IP Businesses

The ESR Resolution defines the core income generating activities for different types of IP businesses:

  • Patents/Similar Assets
  • Research and development
  • Marketing Intangibles/Similar Assets
  • Branding, marketing and distribution

For other IP businesses, the core income generating activities include:

  • Taking strategic decisions related to development and exploitation of IP assets
  • Managing principal risks related to IP assets
  • Acquisition and subsequent exploitation/protection of IP assets
  • Ancillary trading activities through which IP assets are exploited
  • High Risk IP Licensees

The ESR Resolution classifies IP licensees as “High Risk” if they:

  • Did not create the IP they hold
  • Acquired the IP from a connected party or in consideration for funding third party R&D
  • License or earn income from the IP from connected parties

Such high risk IP licensees cannot outsource their core income generating activity or benefit from exceptions available to other IP businesses. They have to undertake substantial R&D activities in the UAE to satisfy the ESR.

  • Economic Substance Test: 

Unless exempted, IP businesses need to meet the economic substance tests under the ESR Resolution including:

  • Conducting core income generating activities in the UAE
  • Being directed and managed in the UAE
  • Having adequate employees, expenses and assets in the UAE
  • They can outsource core activities but need to maintain control and oversight of outsourced activities.
  • Reporting Requirements

Every IP company operating in the United Arab Emirates must abide by the criteria for annual notifications and economic substance reports to their assigned regulatory body.

Businesses dealing in high-risk intellectual property must furnish comprehensive details to reassure regulatory bodies that they adhere to the ESR. They will be penalized and have to pass comprehensive economic substance exams if they don’t comply.

  • ESR and IP Asset Registration

ESR also affects the registration of IP assets in the UAE. An e-application has to be submitted online on the Ministry of Economy portal to apply for copyrights, intellectual property legal rights in the UAE. The intellectual property rights for copyright work are 50 years in the UAE. However, the economic rights for the IP expire after 25 years, calculated from the first calendar day of the calendar year. Patents are protected under Federal Law No 31 of 2016 and Law No 17 of 2002 for the protection and regulation of industrial property of patents. It is essential for companies that use royalties in the UAE to undergo increased ESR testing. Only qualified accountants and chartered accounts can help define the structure of a business.

  • Outsourcing CIGA

IP businesses can outsource their CIGA to an outsourcing provider in the UAE, provided they monitor and control the outsourced activity. The employees, expenditures and assets of the outsourcing provider relating to the outsourced CIGA must be adequate and located in the UAE. The outsourcing provider’s resources cannot be counted multiple times.

  • Additional Requirements for High Risk IP Licensees

High risk IP licensees that acquire IP from connected parties or in return for funding others’ R&D are subject to stricter rules to prove their CIGAs are genuinely in the UAE. The regulator will not assume they satisfy substance unless sufficient information is provided.


Thus by examining the impact of the Economic Substance Regulations on intellectual property businesses it can be seen that the compliance with ESR is necessary to avoid penalties and fines, while compliance can also result in a reduction in tax liability. Therefore, IP businesses must seek expertise of qualified Economic Substance Regulations consultants to thrive in the marketplace and ultimately contribute to the UAE’s economic growth.

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