The United Arab Emirates’ approach to international business regulation has always favored transparency and responsible economic activity. With the introduction and evolution of Economic Substance Regulations (ESR), the UAE continues aligning with global tax standards while maintaining its reputation as a business-friendly jurisdiction. The latest changes to ESR strike a thoughtful balance between compliance and simplicity, creating opportunities for both new and established companies.
What are economic substance regulations in the UAE?
Economic Substance Regulations were first implemented by the UAE in 2019 to meet international requirements set by organizations such as the OECD and EU. These rules were designed to ensure that companies engaging in certain activities in the UAE have real operations in the country, rather than simply using the UAE’s favorable tax regime without contributing to the local economy.
Relevant activities under ESR include banking, insurance, fund management, intellectual property (IP) holding or exploitation, distribution and service centre activities, and a few others. Any local or foreign-owned company, whether onshore or in a free zone, conducting these activities must be able to show adequate economic substance—meaning, genuine presence and active business—in the UAE.
Key changes and current obligations
Recent legislative updates have transformed the compliance landscape. Cabinet Decision No. 98 of 2024 removed the requirement to file separate ESR notifications and reports for financial periods ending after 31 December 2022. This means that companies operating in the UAE, including those in popular business hubs like Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC), no longer face overlapping reporting under two separate regimes.
However, it remains essential to submit notifications and reports for the periods between 1 January 2019 and 31 December 2022 if your business was active then. Furthermore, although standalone ESR filings are not required for periods after 2022, demonstrating economic substance is now an integral part of compliance with the UAE Corporate Tax Law introduced by Federal Decree-Law No. 47 of 2022.
Who needs to comply?
Both onshore companies and those established through UAE free zone business formation that perform relevant activities must continue to pay close attention to their actual operations in the UAE. Exemptions exist for certain categories, such as government-owned entities, investment funds, and branches of foreign companies taxed elsewhere, but even exempted companies need to file a notification and supporting evidence to their regulatory authority.
For each financial period during which a company earns income from a relevant activity, it must meet the Economic Substance Test:
- The company and its relevant activities must be directed and managed in the UAE.
- Core Income Generating Activities (CIGAs) need to be conducted in the UAE.
- There should be enough qualified employees, adequate physical premises, and operational expenses in the UAE, appropriate for the scale of activities.
Practical steps for compliance
Ensuring ongoing compliance—even with the simplified framework—creates a positive foundation for business continuity and growth. Here’s what companies should focus on:
- Review operational structures: Assess whether your core business functions, management decisions, and income-generating activities occur within the UAE. This may involve holding board meetings in the UAE and appointing directors or managers who are resident locally.
- Maintain accurate records: Keep evidence such as meeting minutes, employment contracts, and lease agreements to clearly demonstrate real presence and activity in the UAE.
- Allocate resources appropriately: Make sure that your company has enough qualified personnel, suitable office space, and local operational spending according to your activity type and business volume.
- Annual notifications and filings: While the necessity for annual ESR filings has been lifted for periods after December 2022, companies should check their historical compliance for earlier years. Exempt businesses should still file notifications as required.
- Understand Corporate Tax Law obligations: With ESR requirements now embedded in the corporate tax framework, showing economic substance is essential to benefit from tax incentives and avoid penalties under General Anti-Avoidance Rules (GAAR).
Benefits of the updated regulations
The recent relaxation of administrative reporting requirements is a strong signal that the UAE values ease of doing business. Businesses now enjoy:
- Lower administrative burden: No double reporting for ESR and Corporate Tax after 2022 greatly streamlines internal compliance efforts.
- Simplified compliance: By embedding ESR into the corporate tax regime, requirements are more straightforward and align with global business standards.
- Enhanced business sustainability: The focus on substance encourages companies to deepen their presence in the UAE, which can spur local job creation, investment, and long-term growth.
- Improved global reputation: Proactive adaptation of international standards reassures investors, partners, and global authorities about the transparency and integrity of the UAE’s business environment.
What happens if a business fails to comply?
The UAE takes non-compliance seriously but also provides clear guidance to help companies meet requirements. For earlier periods, failure to submit ESR notifications or reports can result in administrative penalties, including fines and potential suspension or non-renewal of business licenses. Encouragingly, for financial periods after 2022, many past penalties for rejected appeals will be refunded, reflecting a fairer approach and supporting business confidence.
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