ESR Filing in UAE Explained

If you search for ESR UAE filing requirements, you will still find plenty of guides telling companies to submit an annual notification and Economic Substance Report. That information needs an important update.

The UAE cancelled Economic Substance Regulation reporting requirements for financial years ending after 31 December 2022. Cabinet Decision No. 98 of 2024 amended the previous framework, so companies do not have a routine ESR Notification or ESR Report to file for the current financial years. The UAE Ministry of Finance confirmed the change in October 2024.

That does not mean every ESR issue has disappeared. A company may still have obligations connected with financial periods between 2019 and 2022. The Federal Tax Authority or another regulatory authority may also request information relating to those older periods.

There is another reason the subject remains relevant. Economic substance continues to appear in other parts of UAE tax law, particularly the Corporate Tax rules for Qualifying Free Zone Persons. You can read Nexture's UAE Corporate Tax guide for the wider tax framework.

This guide explains what the economic substance regulations UAE framework required, who was covered, what businesses should check today and how to deal with historic ESR compliance.

What Is Economic Substance Regulation in the UAE?

Economic Substance Regulations, commonly called ESR, were introduced in the UAE in 2019. The rules formed part of the country's commitment to international tax transparency standards and the OECD Inclusive Framework.

The basic principle was straightforward. A UAE entity earning income from certain geographically mobile activities had to demonstrate that sufficient business activity actually took place in the UAE.

The regulations applied across the country, including mainland jurisdictions, free zones and financial free zones. The original framework came through Cabinet Resolution No. 31 of 2019. Cabinet Resolution No. 57 of 2020 later replaced it, supported by Ministerial Decision No. 100 of 2020. The official Ministry of Finance ESR page contains the relevant decisions and guidance.

Under the historical framework, a company first had to determine whether it conducted a defined Relevant Activity. If it earned Relevant Income from that activity, it generally had to satisfy an Economic Substance Test unless an exemption applied.

The important ESR update for businesses today

Cabinet Decision No. 98 of 2024 restricted the ESR regime to financial years running within the period beginning 1 January 2019 and ending no later than 31 December 2022.

As a result, companies are no longer required to submit ESR Notifications or Economic Substance Reports for financial years ending after 31 December 2022.

You can read the official Ministry of Finance announcement on the ESR amendment.

If your company existed during the old ESR period, however, do not assume the change automatically clears previous compliance problems.

Who Needs to Assess ESR Requirements?

For current financial years, UAE companies generally do not have a new annual ESR filing UAE requirement.

Your business should still review its historical position if it operated during 2019-2022 and carried on one or more Relevant Activities.

Under the old regulations, a "Licensee" generally covered juridical persons and unincorporated partnerships registered in the UAE that conducted a Relevant Activity. This included entities in mainland UAE, ordinary free zones and financial free zones.

The assessment depended on what the company actually did. The activity written on a trade licence was not always enough to determine the answer.

For example, a company licensed as a general consultancy might also have provided management services to foreign group companies. Those actual transactions could have raised questions about whether it conducted a Headquarters Business or a Distribution and Service Centre Business.

Companies reviewing an older structure should therefore check:

• Actual activities performed during each financial period

• Sources of income

• Customers and related parties

• Group structure

• Loans and financing arrangements

• Equity investments

• Intellectual property income

• Services supplied to foreign connected persons

• Previous ESR Notifications and Reports

Historical exemptions existed for certain investment funds, entities that were tax resident outside the UAE, qualifying UAE-owned domestic businesses and certain UAE branches of foreign companies whose Relevant Income was taxed abroad. Evidence was required when an exemption was claimed.

What Are Relevant Activities Under ESR?

The old ESR reporting UAE framework covered nine categories.

The Ministry of Finance still lists these nine Relevant Activities on its ESR information page.

Classification needed care because the rules followed the underlying activity rather than the company name.

Economic Substance Requirements in the UAE

For historical periods in which the full Economic Substance Test applied, the company generally had to demonstrate four areas.

1. Core Income-Generating Activities in the UAE

   The activities central to earning Relevant Income, known as Core Income-Generating Activities or CIGAs, had to take place in the UAE.

   CIGAs varied according to the Relevant Activity. A finance business, for example, could need to show activities connected with agreeing funding terms, managing risk and monitoring financing arrangements.

2. Direction and Management in the UAE

   Where the directed-and-managed requirement applied, companies needed evidence that genuine strategic decision-making occurred in the UAE.

   This could include appropriate board meetings physically held in the UAE, a quorum of directors attending, signed meeting minutes and directors with enough knowledge to make the relevant decisions.

3. Adequate Employees, Expenditure and Physical Assets

   The regulations did not set one universal minimum number of workers, square metres of office space or amount of expenditure.

   "Adequate" depended on the size and nature of the activity.

   The original legal requirements are set out in the Cabinet Resolution No. 57 of 2020.

4. Proper Control Over Outsourcing

   Certain activities could be outsourced, but simply paying a UAE service provider was not enough. The Licensee had to retain adequate supervision and the relevant outsourced CIGAs had to be carried out in the UAE.

   These concepts remain useful when reviewing historic compliance, but do not confuse the old ESR test with current Corporate Tax rules.

ESR Notification and Filing Requirements

The filing system is one area where outdated online information can create unnecessary confusion.

For reportable periods covered by the old ESR regime, a business conducting a Relevant Activity generally had to submit an ESR Notification within six months after the end of its financial year.

Where the company earned Relevant Income and was required to demonstrate substance, its Economic Substance Report was generally due within 12 months after the financial year-end.

ESR Compliance and Supporting Records

If your company had a Relevant Activity during 2019-2022, keep the supporting file organised even though routine ESR reporting has ended.

Useful records can include:

• Financial statements and accounting ledgers

• Revenue broken down by Relevant Activity

• Employment contracts and payroll records

• Employee roles and working-time information

• Office leases and evidence of physical assets

• Board agendas, minutes and resolutions

• Contracts with customers and group companies

• Loan and finance agreements

• IP ownership and licensing documents

• Outsourcing agreements

• Invoices and evidence of operating expenditure

• Copies of previous ESR Notifications and Reports

• Documents supporting any exemption claimed

The Economic Substance Report guidance required businesses to provide figures covering Relevant Income, operating expenditure, employees, CIGAs, outsourcing and management activity. It also expected businesses to maintain enough records to demonstrate that their resources and expenditure were adequate.

If the FTA requests records relating to an older compliance period, being able to trace the figures back to your books can make the response much easier.

For a wider look at how tax records may be checked, see Nexture's UAE tax audit guide.

Common ESR Compliance Issues

Treating the trade licence as the complete ESR assessment

The business activity on your licence may provide a starting point, but historical ESR classification depended on the transactions and functions actually carried out.

Assuming the 2024 change erased old obligations

This is one of the biggest mistakes companies can make today.

Cabinet Decision No. 98 of 2024 removed ESR requirements for financial years ending after 31 December 2022. It did not remove outstanding obligations for periods that were properly within the 2019-2022 regime.

Incorrect Relevant Activity classification

Holding, financing, headquarters and distribution or service-centre activities could be easy to misclassify, particularly within multinational groups.

Review contracts, invoices and actual functions before deciding which category applies.

Weak evidence of UAE management

A board resolution alone may not demonstrate that a business was genuinely directed and managed in the UAE. Historical files could need board minutes, attendance details, strategic decisions and evidence showing where meetings occurred.

Poor outsourcing records

A company using outsourced employees, premises or services needed to demonstrate proper supervision. The same outsourced staff time could not simply be counted for several Licensees at once.

Incomplete or inaccurate filings

Under Cabinet Resolution No. 57 of 2020, failure to submit a required historical Notification could attract an AED 20,000 administrative penalty. Failure to submit a required Economic Substance Report or failure to meet the Economic Substance Test could attract AED 50,000, with AED 400,000 applying to specified repeat failures in the immediately following financial year. Knowingly providing inaccurate information could also result in an AED 50,000 penalty.

Those figures relate to periods covered by the old regulations. Cabinet Decision No. 98 of 2024 cancelled penalties relating to financial years ending after 31 December 2022. Historical penalties for valid pre-2023 ESR periods should be considered separately.

Conclusion

The most important thing to understand about ESR UAE today is that the rules have changed.

Economic Substance Regulations were an important UAE compliance requirement from 2019 through 2022. Companies carrying out Relevant Activities had to assess their income, economic presence, employees, expenditure, assets and management arrangements and submit the required filings.

For financial years ending after 31 December 2022, the standalone ESR Notification and Economic Substance Report requirements have been cancelled.

Your focus should now be on two areas. First, check whether your business has any unresolved historical ESR obligations from 2019-2022. Second, review the substance requirements that apply under current UAE Corporate Tax rules, particularly if you operate in a free zone and intend to qualify for the 0% rate on Qualifying Income.

Frequently Asked Questions