Compliance
Economic Substance Regulations: Discontinued, But Not Quite Gone
Businesses still ask us when their ESR notification is due. The answer, for any financial year beginning on or after 1 January 2023, is that there isn't one. Economic Substance Regulations were wound back in 2024, penalties levied for later periods are refundable, and the filing portal no longer wants anything from you. What has not gone away is the idea behind them — it moved into the corporate tax regime, where it now does more work than ESR ever did.
What happened
Cabinet Decision No. 98 of 2024 limited the application of the Economic Substance Regulations to a defined window: financial years from 1 January 2019 to 31 December 2022. For financial years beginning on or after 1 January 2023, ESR simply does not apply.
| Financial year | ESR notification | ESR report |
|---|---|---|
| 2019 to 2022 | Was required | Was required for relevant activities |
| 2023 onwards | Not required | Not required |
Administrative penalties imposed for non-compliance relating to periods after the ESR window are to be cancelled, and amounts already collected refunded. Refund requests go through the e-refund facility on the Ministry of Finance website rather than through the FTA.
If you paid an ESR penalty for 2023 or later, that is your money. It is a refund you have to ask for — nothing arrives automatically. Companies that filed late in 2023 or 2024 and paid AED 20,000 or AED 50,000 to make it go away should check whether the period it related to falls outside the ESR window.
Why it was withdrawn
ESR was introduced in 2019 in response to international pressure on jurisdictions where companies could be registered without doing anything there. It required entities carrying on relevant activities — holding, headquarters, distribution, financing, shipping, IP and others — to demonstrate real presence: people, premises, expenditure, and decisions taken in the UAE.
Corporate tax, arriving in 2023, made much of that redundant. A jurisdiction that taxes profit has less need for a separate regime proving that profit was earned somewhere real, because the tax system now asks the same questions through residence, permanent establishment and transfer pricing rules.
What replaced it, and where it bites harder
The substance requirement did not disappear. It moved, and it moved somewhere with more at stake.
A Qualifying Free Zone Person claiming the 0% corporate tax rate must maintain adequate substance in the free zone: core income-generating activities actually performed there, with sufficient assets, qualified employees and operating expenditure to match the activity. Outsourcing within the zone is permitted where supervision is genuine.
Compare the consequences. Failing ESR meant a penalty — unwelcome, but a fixed amount. Failing the substance condition for QFZP status means 9% on all income for that tax period and the next four. For a free zone company with AED 10 million of profit, that is the difference between nothing and AED 900,000 a year.
What you still have to do
- Keep the old records. The 2019–2022 filings and the evidence behind them remain subject to the ordinary retention rules. Seven years for tax purposes is the safe standard.
- Answer questions about closed years. The regulator can still look at the ESR window itself. Discontinued is not the same as expunged.
- Prove substance if you claim 0%. Premises, headcount, payroll and board minutes in the emirate where the licence sits — documented as you go, not reconstructed when asked.
- Claim your refund if a penalty was charged for a period outside the ESR window.
The practical read
Companies that built genuine substance for ESR did not waste the effort — the same evidence files support a QFZP claim. Companies that treated ESR as an annual form to submit have a harder adjustment ahead, because the corporate tax version cannot be satisfied with a declaration. It is tested against what the accounts show about where costs were incurred and who was employed.
Figures, thresholds and deadlines in this article were accurate on 7 September 2026. UAE tax rules change. This is general information, not advice on your circumstances — confirm your own position before acting.
Frequently asked
Do I still need to file an ESR notification?
Not for any financial year beginning on or after 1 January 2023. ESR obligations were limited to financial years from 1 January 2019 to 31 December 2022 by Cabinet Decision 98 of 2024.
I paid an ESR penalty for 2023. Can I get it back?
Penalties relating to periods after the ESR window are to be cancelled and collected amounts refunded. The request goes through the e-refund facility on the Ministry of Finance website. It is not automatic — you have to submit it.
Does my free zone company still need substance?
Yes, and more than before. Adequate substance in the free zone is a condition of Qualifying Free Zone Person status and the 0% corporate tax rate. Failing it applies 9% to all income for that period and the four that follow.
What counts as adequate substance?
Core income-generating activities actually performed in the free zone, with assets, qualified employees and operating expenditure proportionate to the activity. A virtual office, a nominee manager and functions performed by a related company outside the zone are the three arrangements most likely to fail on examination.
Not sure where you stand?
Thirty free minutes with a senior advisor. We will tell you what applies to you, what is due, and whether anything is already overdue.