UAE Ends Economic Substance Reporting
The UAE Economic Substance Regulations (ESR), once a major compliance requirement for many mainland and free zone businesses, have been significantly amended. As per Cabinet of Ministers Decision No. 98 of 2024, ESR obligations will no longer apply to any financial year starting on or after 1 January 2023.
While this is a relief for thousands of businesses, the ESR is not completely gone. Let’s explore what this means, what still applies, and what businesses should do next..
However, in light of the country’s new Corporate Tax regime, the UAE has significantly amended the ESR framework through Cabinet of Ministers Resolution No. 98 of 2024, effectively removing ESR obligations for future financial periods.
Here’s what UAE-based businesses need to know.
What Was ESR?
Introduced in 2019, the Economic Substance Regulations aimed to align the UAE with international tax standards. It ensured that businesses engaged in certain activities had a real economic presence in the UAE, not just a legal structure for tax benefits.
Background: Why Was ESR Introduced?
The UAE issued Cabinet Resolution No. 31 of 2019 on ESR to fulfill its obligations under the OECD Inclusive Framework and in response to EU concerns about tax transparency. Further guidance was issued via:
- Ministerial Decision No. 215 of 2019
- Cabinet Decision No. 58 of 2019 (defining regulatory oversight)
The ESR required certain UAE-based entities conducting Relevant Activities to demonstrate actual economic presence through reporting and operational criteria.
List of Relevant Activities Under ESR
The following businesses were within ESR’s scope:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Distribution & Service Centre Business
Entities that earned income from these activities between 1 January 2019 and 31 December 2022 were required to submit:
- Annual ESR Notification
- Economic Substance Report (within 12 months from FY end)
They also had to meet the Economic Substance Test, unless exempt.
Timeline of ESR in the UAE
- 30 April 2019: ESR introduced via Cabinet Decision No. 31 of 2019
- 11 September 2019: Ministerial Decision No. 215 issued to clarify application
- 2020: Revised and expanded under Cabinet Decision No. 57 and Ministerial Decision No. 100
- 2024: Cabinet Decision No. 98 officially removes filing requirements for financial years after 31 December 2022
2024 ESR Update: Major Amendments Introduced
ESR Ends for FY Starting On or After 1 Jan 2023
Under Cabinet Decision No. 98 of 2024, businesses are no longer required to file ESR notifications or reports for financial years beginning on or after 1 January 2023.
ESR Still Applies to FY 2019–2022
Entities must ensure full ESR compliance for financial periods between 1 January 2019 and 31 December 2022. This includes:
- Filing ESR Notifications
- Submitting ESR Reports (if income from relevant activity exists)
- Meeting substance requirements
Penalty Relief & Refund Provisions
Another key relief measure is the cancellation of administrative penalties imposed for ESR failures after 31 Dec 2022. This includes:
- Automatic penalty waivers
- Refunds for penalties already paid
- Closure of disputes and grievances related to those penalties
ESR vs. Corporate Tax: What Still Matters?
Even though ESR obligations are ending, Corporate Tax law (under Federal Decree-Law No. 47 of 2022) still requires certain businesses—especially Free Zone Persons to maintain adequate substance to benefit from the 0% tax regime.
Key compliance conditions for Free Zone businesses include:
- Conducting Core Income Generating Activities (CIGA) within the Free Zone
- Maintaining adequate assets, full-time qualified employees, and operational expenditure
- Meeting criteria to qualify as a Qualifying Free Zone Person
What Should Businesses Do Now?
| Action | Requirement |
|---|---|
| ESR for FY 2023 onwards | ❌ Not required |
| ESR filings for FY 2019–2022 | ✅ Still required |
| Review substance under Corporate Tax | ✅ Essential |
| Apply for ESR penalty refunds (if applicable) | ✅ Check eligibility |
| Track updates from the FTA | 🔔 Ongoing |
Summary
The UAE’s repeal of ESR for recent years reflects a broader shift to a more integrated corporate tax framework. While ESR obligations have ceased from 2023 onward, the principles of economic substance are far from obsolete especially for Free Zone businesses seeking tax benefits.
Timely compliance with corporate tax substance rules and ensuring previous ESR obligations are closed out properly is crucial to avoid regulatory and financial risks.
