How to Demonstrate "Directed and Managed in the UAE"

Most companies that fail the UAE Economic Substance Test don't fail because they lack employees or assets. They fail because their decisions happen somewhere else.

A board that meets by video call from London. A parent company in Amsterdam that issues instructions down the chain, with a UAE subsidiary rubber-stamping them in Dubai. The UAE calls this the "directed and managed" test, and it's where a surprising number of companies come unstuck.

Here is what the test actually requires, and how to pass it.

What "Directed and Managed" Means Inside the Economic Substance Test

The directed and managed test is one of three legs in the three-part economic substance test. To pass it, a licensee must show that its relevant activity is genuinely governed from within the UAE. Not just that it has a UAE address. Not just that it has a UAE trade licence. That real strategic decisions are being made, by qualified people, on UAE soil.

The legal basis is Article 3 of Cabinet Resolution No. 57 of 2020, the ESR legislation that governs compliance for financial years 2019 to 2022. It is worth being clear about what Cabinet Decision 98 of 2024 actually changed. It limited the formal ESR reporting obligation to periods ending on or before 31 December 2022. It did not eliminate substance requirements. For free zone companies seeking Qualifying Free Zone Person (QFZP) status under the UAE corporate tax regime, a parallel logic applies to all periods after 2022. The requirement never really went away. It just changed framework.

The Legal Standard: Four Requirements Unpacked

Cabinet Resolution 57 sets out five sub-conditions under the directed and managed requirement. Four of them do most of the practical work.

Adequate frequency of UAE board meetings. The legislation uses the word "adequate." It doesn't specify two meetings a year or four. What it means is: proportionate to the amount of decision-making required at board level and to the licensee's activity level. A passive holding structure with minimal transactions probably needs fewer meetings than a trading company making regular commercial decisions. The point is that frequency must be defensible if the FTA comes asking.

Physical quorum in the UAE. This is where video calls cause problems. When a meeting counts for ESR purposes, a quorum of the attending directors must be physically present in the UAE at the time of the meeting. Not dialling in. Not present via screen. Actually in the country. Directors don't have to be UAE residents, but they must be physically in the UAE when the meeting takes place.

Written minutes, signed and kept in the UAE. Board meetings must be recorded in writing. Those minutes must be signed by the directors who attended. Both the minutes and the entity's records must be stored in the UAE. A company secretary in London filing the minutes on a server in Dublin doesn't satisfy this requirement.

Director expertise. The directors who attend must have the knowledge and expertise to actually discharge the duties of the board in relation to the relevant activity. This is the requirement that's easiest to overlook. A UAE-based nominee director who nods along and signs documents doesn't pass. The FTA is looking for genuine competence: someone who understands the core income-generating activities your directors must oversee and can make informed decisions about them.

What "Adequate Frequency" Means in Practice

This is the question everyone asks, and the honest answer is that the regulation doesn't give you a number.

What it does give you is a principle: frequency calibrated to activity level. A licensee doing very little, such as a passive holding structure with minimal transactions, might satisfy the test with two substantive meetings per year. A licensee with active operations, real revenue, and ongoing strategic decisions probably cannot.

In practice, four meetings per year is the working baseline most advisers apply to active businesses, with proper intervals between them rather than four meetings squeezed into December. But frequency alone isn't the point. The content matters more.

A quarterly meeting that reviews management accounts, discusses the direction of the business, and records genuine deliberation is worth far more to the FTA than six meetings that just tick boxes. The FTA isn't counting meetings. It's asking whether those meetings represent real governance.

The Outsourcing Trap: CIGAs Can Be Outsourced, Oversight Cannot

Here's a mistake we see regularly. A company outsources its operational functions to a service provider, assumes that satisfies the substance test, and then runs a board process that's entirely nominal.

The problem is that these are two separate things.

The ESR does allow a licensee to outsource core income-generating activities to a third party. The licensee can still pass the substance test, provided it monitors and controls the outsourced activity, the outsourced activity is performed in the UAE, and the licensee's own resource requirements are met. But outsourcing the work doesn't outsource the oversight. A qualified director, senior manager, or genuine decision-maker must still be directing and managing from the UAE regardless.

This distinction matters even more for QFZP entities under the corporate tax rules. The FTA's 2024 guidance on Free Zone Persons is explicit: rubber-stamping decisions taken outside the UAE doesn't qualify. Key decisions need to be made within the free zone, not merely executed there.

Common Mistakes That Fail This Test

We've spoken to founders and finance teams across the UAE who believed they were compliant and weren't. The patterns are consistent.

The offshore parent problem. The real decisions are made at group level, by a CFO in Singapore or a board in Switzerland, and the UAE entity does whatever it's told. The UAE board meeting is a formality. The minutes reflect decisions already made elsewhere. That's not directed and managed from the UAE.

The telephone director. A UAE-licensed company where the only director with UAE substance is a professional nominee who signs documents but has no real knowledge of the business. The expertise requirement makes this arrangement unworkable.

Bad minute-taking. Directors attend a meeting in Dubai, but no minutes are prepared, or they're prepared retrospectively by a paralegal in another jurisdiction, or they record nothing substantive beyond the fact that a meeting occurred. Minutes must record the making of strategic decisions. Not just their outcomes. The actual deliberation.

The video quorum assumption. Many companies believe that a quorum of directors joining by video from overseas satisfies the physical presence requirement. It doesn't. The quorum must be physically in the UAE.

These failures carry real consequences of failing the directed and managed test. For the ESR period, penalties reach AED 400,000 in the second year of non-compliance. For QFZP entities, losing qualifying status triggers a lockout period: the current year and the following four tax years are all assessed at the standard 9% corporate tax rate on full income, not just qualifying income.

How a Fractional Executive Satisfies Directed and Managed

The practical challenge for many SMEs and free zone companies is straightforward: they can't justify, or simply don't need, a full-time senior executive resident in the UAE. But they do need a UAE-based, qualified person to provide or attend board-level oversight.

This is precisely what a fractional executive provides for directed and managed purposes. A fractional executive is physically based in the UAE. They have genuine expertise in the relevant activity. They attend board meetings in person. They participate in real strategic deliberation, asking questions, reviewing performance against targets, and contributing to decisions rather than rubber-stamping them.

The documentation that comes with a properly structured fractional engagement maps directly onto what the FTA requires. Meeting attendance records, signed minutes, evidence of expertise: these aren't bureaucratic extras in this context. They are the substance test made visible.

To understand how a fractional engagement is structured, it typically involves a defined scope of oversight, regular in-country attendance at governance meetings, and a clear contemporaneous paper trail. That structure is what transforms a fractional arrangement from a cost-saving measure into a genuine compliance solution.

Our ESR Qualified Executive service is designed specifically for this purpose: UAE-resident, sector-experienced, and documentable in the ways that regulators expect.

Documentation Checklist: What the FTA Expects

If the FTA conducts an assessment, a compliant directed and managed position looks like this in the file:

• Board meeting calendar showing dates, UAE locations, and attendees
• Signed minutes for each meeting, stored in the UAE, recording the making of strategic decisions in relation to the relevant activity
• Evidence of physical presence in the UAE at the time of each meeting (travel records, hotel receipts, or similar documentation)
• Director CVs or profiles demonstrating expertise relevant to the relevant activity
• Outsourcing contracts (if applicable) showing the licensee's monitoring and oversight role
• All records kept in the UAE in English, accessible to the regulatory authority on request
• For QFZP entities: documentation linking board decisions to free zone operations and core income-generating activities

One thing worth noting: the FTA has a six-year review window. Documents need to survive that long in retrievable form. For the ESR period, that means records going back to 2019 could still be requested through to 2025 and beyond.

If you're unsure whether your current governance structure genuinely satisfies the directed and managed test, the right place to start is an honest audit of how decisions actually get made, not how they're supposed to get made on paper.

Assess your directed and managed position using our readiness tool, or speak to the Fractional Dubai team to explore how a qualified UAE-based executive can anchor your substance position properly.

Frequently Asked Questions

Do directors need to be UAE residents to satisfy the directed and managed test?

No. The legislation is clear on this. Directors don't have to be UAE residents. But they must be physically present in the UAE when board meetings take place. Residency and physical presence at meetings are different requirements.

Does a video call board meeting count for directed and managed purposes?

No. The quorum requirement specifies that directors must be physically present in the UAE at the time of the meeting. Directors joining by video from another country don't count towards quorum for ESR purposes.

How many board meetings per year satisfy "adequate frequency"?

The regulation doesn't specify a fixed number. It calibrates to activity level. For an active business, four substantive meetings per year is a common working benchmark. What matters more than the number is the content: minutes must record real strategic deliberation about the relevant activity, not just that the meeting occurred.

Does the directed and managed test still apply after 2022?

For formal ESR reporting purposes, the obligation ended for financial years after 31 December 2022, following Cabinet Decision 98 of 2024. But for free zone companies seeking QFZP status under the corporate tax regime, very similar substance logic continues to apply. The FTA has been explicit that rubber-stamping decisions made outside the UAE does not qualify.

Can a fractional executive satisfy the director expertise requirement?

Yes, provided the individual has genuine knowledge of and experience in the relevant activity. A fractional executive who is UAE-based, sector-qualified, and actively participates in strategic governance satisfies both the physical presence and expertise requirements under the directed and managed test.