Economic Substance Regulations in the UAE: What Changed and What Is Left.

From 2019, many UAE companies had to file an economic substance notification each year, and those carrying on certain "relevant activities" also had to file a report proving they had real operations in the country. For most businesses, that annual exercise is now over.

It is not over for every year, though, and the idea of substance has not gone away. Here is what changed, and what is left.

What changed

The Economic Substance Regulations (ESR) began with Cabinet Resolution No. 31 of 2019, issued on 30 April 2019, and were later replaced by Cabinet Resolution No. 57 of 2020. Cabinet Decision No. 98 of 2024 amended that 2020 resolution.

On 14 October 2024, the Ministry of Finance announced the result: companies are no longer required to submit economic substance notifications or reports for financial years ending after 31 December 2022. The Ministry said the change aligns with the introduction of Corporate Tax, which applies to tax periods starting on or after 1 June 2023.

The date that decides it

The cut-off is about when a financial year ends, not when it starts. That catches out anyone reading it as "2023 onwards".

• Year ended 31 December 2022. Still inside ESR. For a company carrying on a relevant activity, the notification and, where required, the report were due for this year.
• Year from 1 July 2022 to 30 June 2023. Ended after 31 December 2022, so no notification or report is required, even though most of the year fell in 2022.
• Year ended 31 December 2023, and every year after. No notification or report.

So for most companies, the last years in scope are those ending between 2019 and 31 December 2022.

What earlier years still carry

The Ministry was explicit that the change does not reach backwards. Companies remain responsible for:

• fulfilling compliance obligations for prior years,
• responding to information or amendment requests from regulatory authorities or the Federal Tax Authority (FTA), and
• paying any penalties imposed by the FTA.

The FTA is the National Assessing Authority under the ESR. It assesses whether the economic substance test was met, imposes penalties, and hears appeals. Under Cabinet Resolution No. 57 of 2020:

• The assessment window is six years. The FTA can decide that a company did not meet the substance test for a financial year up to six years after that year ended. For a year ended 31 December 2022, that runs to 31 December 2028. The limit does not apply where the delay is caused by misrepresentation, fraud or gross negligence.
• Penalties have their own six-year limit. A penalty generally cannot be imposed more than six years after the violation was committed, unless fraud prevented it.
• The penalty amounts are significant. AED 20,000 for failing to submit a notification, and AED 50,000 for failing to submit a report or failing to meet the substance test. A repeat failure in the following year carries AED 400,000.
• Penalties can be appealed. Grounds include not having committed the violation, or the penalty being disproportionate. The FTA directs appeal requests to the Ministry of Finance ESR dashboard.

Old notifications and reports: keep them

Anything you submitted under the ESR still matters. The 2020 resolution requires documents submitted under it to be kept for six years from the date they were submitted. A report filed in late 2023 for the 2022 year should therefore be kept until at least late 2029, alongside the working papers behind it: board minutes, employee and premises records, and the income and expense figures used.

Where substance still matters: Corporate Tax

The ESR reports have gone, but substance is now built into Corporate Tax for Free Zone companies.

A Free Zone company can pay 0% Corporate Tax on its Qualifying Income only if it is a Qualifying Free Zone Person, and one of the conditions in Article 18 of the Corporate Tax Law is that it maintains adequate substance. The FTA's Free Zone Persons guide explains what that means for each tax period:

• the core income-generating activities for the business are carried out in the Free Zone (or in a Designated Zone for distribution activities), and
• the company has adequate assets, an adequate number of qualified full-time employees, and adequate operating expenditure there.

Core activities can be outsourced to another person in the Free Zone, related or not, if the company can monitor, control and show adequate supervision of the work, and the provider's staff, spending and assets are adequate for it.

The stakes are high. A company that fails any Qualifying Free Zone Person condition loses the status from the start of that tax period and for the four tax periods that follow. In practice, a lapse in substance can put five tax periods of 0% treatment at risk.

What records to keep now

• ESR years (ending by 31 December 2022). Notifications, reports, FTA correspondence and supporting evidence, for at least six years from submission.
• Corporate Tax years. The Corporate Tax Law requires records to be kept for seven years after the end of the tax period they relate to.
• Free Zone substance evidence. Premises and lease documents, headcount and payroll records showing who works in the Free Zone, board and management minutes, and outsourcing agreements with evidence of how you supervise them.

Clean monthly bookkeeping makes most of this a by-product rather than a year-end scramble.

How we help

As part of our Corporate Tax filing service, we check whether any ESR years are still open, keep your old submissions organised, and, for Free Zone clients, keep a running file of the substance evidence behind each tax period.

Frequently asked questions

Do I need to file an ESR notification or report for 2023 or later?

No. Following Cabinet Decision No. 98 of 2024, companies are no longer required to submit economic substance notifications or reports for financial years ending after 31 December 2022.

My financial year ran from 1 July 2022 to 30 June 2023. Is it covered?

It falls outside the requirement. The test is when the financial year ends, not when it starts, and this year ended after 31 December 2022.

Can the FTA still issue ESR penalties for 2019 to 2022?

Yes. The Ministry of Finance confirmed that companies remain responsible for prior-year obligations, requests from regulators or the FTA, and any penalties the FTA imposes. The rules allow a finding that the substance test was not met up to six years after the end of the financial year concerned.

Does ESR still matter for a Free Zone company?

The ESR reports have gone for later years, but a Qualifying Free Zone Person must maintain adequate substance in a Free Zone to keep the 0% Corporate Tax rate on its Qualifying Income.