ESR UAE 2026: Why Economic Substance Regulations Were Repealed and Who Still Has to File

If you are searching for the Economic Substance Regulations in the UAE in 2026, the headline answer is short — the regime was effectively repealed for financial years ending after 31 December 2022 by Cabinet Decision No. 98 of 2024, and the substance test moved into the UAE Corporate Tax framework.

The longer answer matters too, because thousands of UAE entities still carry historical ESR exposure for the 2019 to 2022 window, and every free zone group claiming the 0% corporate tax rate now lives under a substance test that looks very much like the old ESR rules in a new wrapper. If you need hands-on economic substance regulations support UAE — a historical ESR reconciliation or a Qualifying Free Zone Person substance file built to current standards — our advisory team can help.

This guide walks through what the UAE Economic Substance Regulations were, the nine ESR Relevant Activities, the substance test, the 2024 cancellation, the migration into Corporate Tax, who still has to file historical reports, and the ESR penalties regime as it stands today. For the short status answer on its own, see are ESR rules still in force in the UAE.

What ESR actually was

The UAE Economic Substance Regulations were introduced by Cabinet of Ministers Resolution No. 31 of 2019 under the UAE’s commitments to the OECD’s BEPS Action 5 framework and the EU Code of Conduct Group’s review of “no or only nominal tax” jurisdictions. The aim was anti-avoidance: stop multinational groups booking income in a UAE entity that had no real activity, employees or operating substance in the country.

Cabinet Resolution No. 57 of 2020 replaced the 2019 rules, tightened definitions and confirmed the Federal Tax Authority as the assessing authority. From the 2020 reissue on, ESR applied to any UAE entity (mainland, free zone, financial free zone like DIFC and ADGM, and branches) that carried on one of nine Relevant Activities and earned relevant income from it. It was the first general-purpose anti-BEPS rule ordinary UAE businesses had to deal with, and it pre-dated federal corporate tax by three years.

Nine activities that pulled you in

ESR applied only if a licensee carried on a Relevant Activity during the financial period. The nine activities defined under Cabinet Decision 57 of 2020 were:

1. Banking business — accepting deposits and granting credit
2. Insurance business — underwriting risk for premium
3. Investment fund management business — discretionary investment management of funds
4. Lease-finance business — extending credit or financing for consideration other than as a bank or insurer
5. Headquarters business — providing senior management, strategic or substantive advice to non-resident group entities
6. Shipping business — operating ships in international waters
7. Holding company business — passive holding of equity participations in other entities
8. Intellectual property business — exploiting patents, copyrights, trademarks and similar IP assets
9. Distribution and service centre business — purchasing from and selling to foreign related parties, or providing services to foreign related parties

The Holding Company and Distribution & Service Centre categories were the two that caught the largest number of ordinary UAE SMEs, because almost every free zone holding structure and almost every regional distribution hub fell within scope.

That list is what people mean when they search for the relevant activities under economic substance rules, and it is worth being clear that the test was always activity-based rather than sector-based. What mattered was what the entity actually did in the period, not what its trade licence said or which registry it sat in. Financial free zone entities were treated the same way as everyone else: an ADGM or DIFC company carrying on a Relevant Activity had the same economic substance obligation as a mainland LLC, and being in a common-law jurisdiction bought no exemption. The one thing that did vary by registry was the regulatory authority you dealt with — the filing itself always ran through the same federal portal.

How the substance test actually worked

A licensee that carried on a Relevant Activity and earned relevant income had to demonstrate adequate economic substance in the UAE, and the test ran on four limbs, assessed every year.

The entity had to be directed and managed in the UAE — board meetings held with a quorum of directors physically in the country, minuted, with the strategic decisions actually taken here. Its Core Income-Generating Activities, the CIGA, had to be performed in the UAE, and each Relevant Activity had its own CIGA list: Distribution & Service Centres covered transporting goods, managing inventory and taking orders, while Holding Companies ran on reduced substance, needing little more than to meet the filing requirements and hold adequate employees and premises.

It needed adequate qualified full-time employees physically present in the UAE, though outsourcing to a local service provider was allowed as long as the licensee kept oversight and the resources weren’t double-counted across that provider’s other clients. And it had to incur adequate operating expenditure and hold adequate physical assets in the UAE, in proportion to the relevant income earned.

There was no fixed numeric threshold — it was always a facts-and-circumstances test scaled to the volume of relevant income, which is exactly the proportional reasoning the UAE Corporate Tax law now applies to Qualifying Free Zone Persons.

“

The substance test never disappeared from UAE compliance. It moved from a standalone ESR form to a structural requirement of the Corporate Tax framework — and the evidence file you should maintain to defend it is essentially the same.

The filing rhythm while ESR was live

For each financial period covered by ESR (broadly 2019 to 2022), every UAE licensee had two annual steps to work through the Ministry of Finance’s ESR portal.

The notification came first, due within six months of year-end, confirming whether the licensee carried on a Relevant Activity, whether it earned income from it, whether it was tax resident elsewhere, and the period end date. It was mandatory for every licensee, even those with no relevant income and those claiming exemption. The economic substance report followed, due within 12 months of year-end but only where the licensee carried on a Relevant Activity and earned relevant income in the period. It set out the CIGA performed in the UAE, employee numbers, operating expenditure, physical assets and the directed-and-managed evidence — and holding companies on reduced substance filed an abbreviated version.

The FTA was the National Assessing Authority — it reviewed reports, raised assessments and imposed penalties, while the Ministry of Finance acted as competent authority for international exchange of information.

Mechanically, ESR filing in the UAE happened in one place. Both submissions were made through the Ministry of Finance ESR portal at esr.mof.gov.ae, and the ESR login credentials created for the first notification were the same ones used for every filing after it. That single detail causes more trouble in 2026 than it should: the person who set up the account has often left, so a company reconstructing its history cannot see what it actually filed. If you need to reconstruct a 2019-2022 record, recovering portal access is the first job, not the last.

Then September 2024 happened

On 2 September 2024 the UAE Cabinet issued Cabinet Decision No. 98 of 2024, amending Cabinet Decision 57 of 2020, and it did three concrete things that effectively ended ESR for forward-looking compliance.

It cancelled the obligation to file ESR notifications and reports for any financial year ending after 31 December 2022, so the notifications and reports otherwise due in 2024 — including those that would have covered calendar-year 2023 — simply fell away. It removed the administrative penalties attached to those same post-2022 years, so no AED 20,000 notification penalty, AED 50,000 substance penalty or AED 400,000 second-year penalty arises for a period ending after 31 December 2022.

On refunds of penalties already paid, be careful what you rely on. Numerous advisory firms have written that the Federal Tax Authority must refund penalties paid for post-2022 periods through an e-refund process. We could not verify that from a government source, and we are not going to state it as fact.

What the Ministry of Finance actually published, in its announcement dated 14 October 2024, is the opposite emphasis: businesses “remain responsible” for fulfilling compliance obligations for prior years, for responding to information or amendment requests from the regulatory authorities or the Federal Tax Authority, and for paying any penalties imposed by the Federal Tax Authority. The full text of Cabinet Decision No. 98 of 2024 is not published on the Ministry’s ESR page — the only Cabinet-level ESR document downloadable there is Cabinet Resolution No. 57 of 2020 — so there is no primary text to check the refund claim against.

If you have paid an ESR penalty for a period ending after 31 December 2022, put the question to the FTA directly and treat any recovery as uncertain until it lands.

The Ministry of Finance’s reasoning for the amendment was plain: the UAE Corporate Tax law under Federal Decree-Law No. 47 of 2022 now carries its own substance requirements, and running ESR alongside it would have meant duplicate compliance for the same policy outcome. In the Undersecretary’s words, lifting the reporting requirement “allows businesses to focus on compliance with the UAE corporate tax system.”

Were the UAE Economic Substance Regulations repealed?

Yes and no, and the distinction is worth getting right. When people say the UAE Economic Substance Regulations were repealed, what actually happened is narrower than a full statutory repeal. Cabinet Decision No. 98 of 2024 amended the 2020 rules rather than striking them from the books, and it cancelled the notification, report and penalty obligations only for financial years ending after 31 December 2022. So for any business with a 2023 year-end or later, the practical effect is a clean repeal — nothing left to file, nothing left to pay. For the 2019 to 2022 years, the old rules still stand and remain enforceable.

That is why you will see the regime described both as “repealed” and as “cancelled going forward” — both are fair, they just describe different periods. If your only question is whether you have an ESR filing coming up in 2026, the answer is no. If your question is whether historical exposure can still surface, the answer is yes. Read the two dates together and the picture is clear.

Why were the Economic Substance Regulations repealed?

The short reason the Economic Substance Regulations were repealed is duplication. When ESR was written in 2019, the UAE had no federal corporate tax, so a standalone substance regime was the only way to satisfy the OECD and the EU that profit booked in the UAE reflected real activity. Federal Decree-Law No. 47 of 2022 changed that. The Corporate Tax law carries its own substance requirements — most visibly the Qualifying Free Zone Person conditions — so keeping ESR running alongside it meant two sets of filings testing the same thing.

The Ministry of Finance said as much when the amendment landed: the substance policy now lives inside the Corporate Tax framework, and asking businesses to prove it twice served no purpose. So the regulations were repealed for future periods and the test was folded into the return instead. For most free zone groups this is not a relief so much as a relocation — you still hold adequate employees, spend and assets in the UAE, you just evidence it through your Corporate Tax position now rather than a separate ESR report. The short-status version sits in our note on whether ESR rules are still in force.

Same test, new wrapper — Corporate Tax

The reason ESR could be repealed without weakening the UAE’s anti-BEPS position is that the substance policy migrated wholesale into the UAE Corporate Tax framework, and two parts of Federal Decree-Law No. 47 of 2022 carry most of the load.

Article 18 does the heavy lifting through the Qualifying Free Zone Person (QFZP) rules. To keep the 0% rate on qualifying income, a free zone entity has to maintain adequate substance in the UAE, and the QFZP Ministerial Decisions — Ministerial Decision No. 265 of 2023, now repealed and replaced by Ministerial Decision No. 229 of 2025 — spell that out as an adequate number of qualified full-time employees in the UAE, adequate operating expenditure in the UAE, and adequate assets in the UAE, each measured against the level of activity.

That is the same proportional, facts-and-circumstances test ESR ran, and you can check the qualifying-income perimeter with our free zone qualifying income checker. Alongside it, the Foreign Permanent Establishment exemption in Article 24 and the Participation Exemption in Article 23 each carry their own substance and minimum-holding tests, which track the policy behind ESR’s old headquarters and holding-company rules.

For an offshore company or a free zone holding structure, the practical upshot is that the evidence file you once built for the ESR substance report — board minutes, employee headcount, operating expenditure analysis, physical-asset register, outsourcing arrangements — is the same file you now keep to defend QFZP status in a Corporate Tax audit. The form changed; the workpapers didn’t.

Who’s still on the hook?

The repeal is prospective, so historical exposure is real and assessable, and a handful of fact patterns still carry ESR risk in 2026. The most basic is a missed notification for 2019, 2020, 2021 or 2022 — a licensee that carried on a Relevant Activity in any of those periods and failed to file within six months of year-end can still be assessed the AED 20,000 penalty per period. Next is the entity that filed its notification but never lodged the substance report: where relevant income was earned and the report was therefore due within 12 months of year-end, missing it can trigger the AED 50,000 first-year penalty. Worse again is a licensee that failed the substance test in two consecutive years inside the 2019-2022 window, which can attract the AED 400,000 penalty plus exchange of information.

Two patterns catch people who assumed they were clear. Plenty of free zone holdcos never realised they were in ESR scope at all, but late-discovered Holding Company status doesn’t erase the historical periods — those years stay assessable. And Distribution & Service Centre groups, the regional hubs that bought from or sold to foreign related parties, almost always met the activity definition, so any incomplete historical filing is still exposed.

The penalty ladder, for the years that still count

For periods that remain in scope, the original ESR penalty schedule under Cabinet Decision 57 of 2020 still applies:

Every row above was read from the Ministry of Finance’s published English text of Cabinet Resolution No. 57 of 2020 on 5 August 2026.

Two limitation rules sit underneath that table and they change how much of the 2019-2022 window is still genuinely live. Article 7(1) allows the FTA to determine a failed substance test only within six years of the end of the financial year concerned, and Article 16(1) applies the same six-year limit to imposing a penalty. Article 7(2) and Article 16(3) both disapply the limit where misrepresentation, fraudulent action or gross negligence stopped the authority acting in time, and Article 16(2) puts the inaccurate-information penalty on a different clock — twelve months from the date the violation came to the FTA’s attention. For a calendar-year UAE entity that means 2019 has run out, and 2020, 2021 and 2022 run out at the end of 2026, 2027 and 2028 respectively.

Beyond the monetary penalties, failing the substance test triggered exchange of information with the foreign parent’s tax authority. Articles 10(1) and 11(1) of Cabinet Resolution 57 of 2020 route the file from the FTA to the Ministry of Finance as Competent Authority and on to the foreign authority of the jurisdiction where the parent company, ultimate parent company and ultimate beneficial owner reside — a downstream challenge that was often costlier than the AED penalty itself.

When the two regimes overlapped

In the 2022-2023 transition, ESR ran in parallel with the new Corporate Tax law. For a typical free zone holdco with a calendar year-end the calendar was: 31 December 2022 as the last in-scope ESR period; 30 June 2023 for the final ESR notification; 31 December 2023 for the final substance report; 1 January 2024 as the start of the first Corporate Tax period for a calendar-year entity (Corporate Tax applies to financial years starting on or after 1 June 2023); and 2 September 2024 as the date Cabinet Decision 98/2024 cancelled prospective ESR.

That overlap is why ESR still feels confusing in 2026. For a single 2022 year-end you may have an open ESR report and an open Corporate Tax registration, even though the two regimes have effectively merged for all later periods. Reconcile historical ESR filings before lodging the first Corporate Tax return.

What Velmont Crest sees in 2026

The same few patterns keep recurring across UAE SMEs and free zone holding groups. The first is holding companies with no historical ESR filings — holdcos set up in 2019-2021 that filed nothing because the directors read the entity as “just a holding company”. The reduced-substance regime — covered in detail in our guide to ESR for holding companies in the UAE — still required a notification, and the AED 20,000 per-period penalty is still assessable. The second is Distribution & Service Centre groups that filed the notification and then stopped, never lodging a substance report; the first-year AED 50,000 penalty is the most common historical exposure we come across.

The third is groups treating QFZP substance as a paperwork exercise. Some have let the substance file lapse entirely, assuming Corporate Tax registration alone secures the 0% rate. It doesn’t. Our CFO advisory team usually rebuilds the substance evidence file during the first Corporate Tax cycle, alongside transfer pricing UAE documentation for related-party flows and UAE audit requirements 2026 for the QFZP-mandatory audited accounts. Groups inside the EUR 750m Pillar Two perimeter should layer DMTT UAE Pillar Two calculations onto the same evidence base.

If you traded in scope between 2019 and 2022, do this first

If you carried on a Relevant Activity in the 2019 to 2022 window, start with a historical ESR reconciliation: pull every notification and report you filed, find the gaps, and put a number on the penalty exposure before the FTA does it for you. In our experience, cleaning this up voluntarily is nearly always cheaper than waiting for an assessment to land.

If your financial year started on or after 1 January 2023, you have no further ESR filing to make — but you have inherited the substance test in a new form. Build and maintain the QFZP substance file the same way you would have built the ESR file: board minutes, qualified-employee schedule, UAE operating expenditure analysis, UAE asset register, and outsourcing documentation.

If you are uncertain whether you ever fell within ESR scope, document the analysis. A short scoping memo recording why a Relevant Activity did or did not apply — signed and dated per year — is the cheapest insurance against an FTA reassessment.

Velmont Crest’s accounting services in Dubai provides advisory support on historical ESR reconciliation and the related substance evidence needed to defend Qualifying Free Zone Person status under the UAE Corporate Tax law. We are a DED-licensed UAE accounting firm and an official channel partner of Meydan Free Zone and RAKEZ, and a referral partner elsewhere. For a scoping conversation, please contact us.

Disclaimer: Velmont Crest is a DED-licensed accounting firm. We provide advisory, preparation and compliance support services. Economic Substance Regulations and Corporate Tax rules change frequently — verify all figures and obligations with the relevant authority before acting and consult a licensed legal or tax professional for advice specific to your circumstances.

References

• UAE Ministry of Finance — Economic Substance Regulations
• Cabinet of Ministers Resolution No. 57 of 2020 — Economic Substance Regulations (reissued)
• Cabinet Decision No. 98 of 2024 — Amendment to ESR (effective 2 September 2024)
• Federal Decree-Law No. 47 of 2022 on Corporate Tax
• OECD BEPS Action 5 — Countering Harmful Tax Practices