For four years, running a company in the UAE meant an annual ritual: work out whether you carried
on a Relevant Activity, file a notification, then file a report proving you had enough people, spend
and premises here to justify the profits you booked. The Economic Substance Regulations
were the price of admission to a jurisdiction with no corporate income tax.
That regime is over — and a striking number of advisers, checklists and company-formation websites
still describe it as though it is live. Here is what actually changed, what did not, and why the
distinction still costs money in 2026.
What changed
Cabinet Decision 98 of 2024 amended Cabinet Decision 57 of 2020 and ended the regime going forward.
The Ministry of Finance announced it on 14 October 2024, describing the change as the “cancellation of
economic substance reporting requirements for companies for financial years ending after 31 December
2022”.
That wording repays attention. The Ministry says financial years ending after 31 December
2022. Most professional-firm summaries say financial years starting on or after 1 January
2023. For a calendar-year business — the overwhelming majority here — the two are identical. For a
company with, say, a July-to-June year, they are not. If your financial year straddles the boundary,
that is a question for your adviser and not one this article will answer for you, because the public
sources genuinely do not speak with one voice on it. The safe general statement is: from the 2023
financial year onwards, there is no economic substance filing.
What did not change
This is the part that catches people. ESR was discontinued prospectively. It was
not abolished retroactively, and the past has not been tidied away.
The Ministry’s own announcement is explicit that companies “remain responsible for fulfilling
compliance obligations for prior years, adhering to information or amendment requests from regulatory
authorities or the Federal Tax Authority, and paying any penalties imposed by the Federal Tax
Authority.” Filings for the financial years 2019 through 2022 that were never made are still owed.
And the enforcement window is long. Article 16 of Cabinet Resolution 57 of 2020 bars a penalty more
than six years after the violation — which means exposure for the 2020, 2021 and 2022 years is still
live as this is published. Advisers report that fines already imposed for the cancelled years are to
be cancelled and refunded, with related appeals terminated; we flag that as an adviser reading, because
the Ministry’s own announcement does not mention refunds.
What ESR was, briefly
The regime arrived as Cabinet Resolution 31 of 2019, was repealed and replaced by Cabinet Resolution
57 of 2020 in August 2020, and was fleshed out by Ministerial Decision 100 of 2020.
The Ministry never disguised why it existed. Its own FAQ says the rules were issued “as part of its
commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s
tax framework by the European Union Code of Conduct Group on Business Taxation”, and that the 2020
instruments were “prepared in consultation with the OECD and the EU”. The stated purpose was to ensure
UAE entities reported profits commensurate with the economic activity actually undertaken here.
Nine Relevant Activities triggered it, listed in Article 3(1): banking, insurance, investment fund
management, lease-finance, headquarters, shipping, holding company, intellectual property, and
distribution and service centre business.
A company carrying one on had to pass the Economic Substance Test in Article 6: conduct the relevant
Core Income-Generating Activity in the UAE; be directed and managed here; and — proportionate to the
level of activity — have an adequate number of qualified full-time employees physically present in the
UAE, adequate operating expenditure here, and adequate physical assets here.
“Directed and managed” had teeth. Article 6(3) required board meetings in the UAE at adequate
frequency, a quorum physically present in the country, signed written minutes recording strategic
decisions, directors with the relevant expertise, and all records kept in the UAE. Outsourcing was
allowed under Article 6(2), but only if the work was supervised from within the UAE and the provider’s
UAE-based resources were not double-counted across several clients.
Two filings were due each year: a notification within six months of the financial year end, and a
full report within twelve. The Ministry of Finance was the Competent Authority; the Federal Tax
Authority was the National Assessing Authority that judged whether the test was met and imposed the
penalties.
| Breach | Penalty |
|---|---|
| Failure to submit the notification (Art. 13) | AED 20,000 |
| Failure to submit the report, or to meet the substance test, per year (Art. 14) | AED 50,000 |
| Same failure repeated the following year (Art. 14(3)) | AED 400,000, plus possible licence suspension, revocation or non-renewal |
| Knowingly providing inaccurate information (Art. 15) | AED 50,000 |
One persistent myth is worth killing here: ESR was never a free-zone-only regime. The definition of
“Licensee” in Article 1 covers entities registered anywhere in the State, “including a Free Zone and a
Financial Free Zone” — so mainland companies were caught too. If you are weighing those structures,
our comparison of DIFC
and ADGM and our guide to
free zone versus
mainland setup cover the choice as it stands now.
Why it ended
The Ministry ties the change directly to tax: the amendment “aligns with implementation of the UAE’s
federal corporate tax system” and aims to “enhance efficiency and tax compliance across the country”.
The logic is straightforward once you see it. ESR was a stand-alone substance regime built to answer
the EU and the OECD in a country that had no corporate income tax to answer them with. Once the UAE
introduced corporate tax — for financial years beginning on or after 1 June 2023, at a headline rate of
9% — it acquired transfer pricing rules, free-zone qualifying-income conditions and an annual return
that ask many of the same questions. A separate substance filing became duplication.
Note those two dates do not line up. Corporate tax starts with financial years beginning on or after
1 June 2023; ESR ends for financial years ending after 31 December 2022. They are different tests on
different clocks, and for some businesses there is a genuine gap between them.
Substance itself did not die. It moved inside the corporate tax regime, most visibly in the adequate
substance condition a Qualifying Free Zone Person must satisfy to reach the 0% rate. Our guides to the
9%
corporate tax regime and to
the
free-zone rules and filing set out what that now requires, and our explainer on
Small Business
Relief covers the exemption most smaller companies actually use. Businesses at registration stage
should also read our walkthrough of VAT
registration with the FTA.
Why the stale advice persists
Partly inertia, and partly because the official record has not fully caught up. As at the date of
publication, the Federal Tax Authority’s own Economic Substance Regulations pages still set out the
regime — the notification, the report, its role as National Assessing Authority — without noting the
2024 discontinuation. Anyone landing there from a search engine would reasonably conclude the
obligation is live.
It is a small thing, and a familiar one: the UAE legislates faster than its guidance is rewritten.
We found the same pattern with Small Business Relief, where the FTA’s published guide still prints an
end date that a 2026 ministerial decision has since moved. The practical lesson for anyone running a
company here is the same in both cases — the decision text governs, the guidance follows, and the gap
between them is where expensive mistakes live.
Primary sources: the Ministry of Finance’s
announcement
of the amendment to the Cabinet Decision on Economic Substance Requirements and its
ESR
page; the full text of
Cabinet
Resolution 57 of 2020 and the Ministry’s
ESR
FAQ; the Federal Tax Authority’s
ESR pages; and the
Ministry’s corporate
tax page. This article is general information, not tax advice.
