In a major development, the UAE Cabinet of Ministers, through Decision No. (98) of 2024, announced that the Cabinet Ends Economic Substance Regulations (ESR), which will no longer apply to financial years starting on or after January 1, 2023. This change brings significant regulatory relief for UAE businesses, as the need for filing ESR reports and demonstrating economic substance is removed for the 2023 financial year onwards.
Compliance for ESR Period (2019–2022)
For financial years between January 1, 2019 and December 31, 2022 (ESR Period), businesses are still required to comply with ESR obligations. Any entity that qualified as a “Licensee” during this period must:
- Submit Economic Substance (ES) notifications,
- File ES annual reports, and
- Demonstrate adequate substance within the UAE.
Entities that missed these filing requirements for the ESR period should complete their filings promptly to avoid compliance issues.
Furthermore, licensees that have already filed ESR reports for periods after January 1, 2023, should await further clarification on the status of these submissions.
Impact on Free Zone Entities
While the ESR no longer applies from January 1, 2023, free zone entities that wish to take advantage of the 0% corporate tax rate as Qualifying Free Zone Person under the UAE’s Corporate Tax regime will still need to meet adequate substance requirements. Such Free Zone Persons must:
- Conduct core income-generating activities within the free zone,
- Maintain sufficient assets, employ an adequate number of qualified staff, and incur reasonable operating expenses in the free zone.
Document Retention and ESR Portal Access
Licensees are required to retain all supporting documents related to their Economic Substance Regulations (ESR) compliance, including access to the ESR portal, for at least six years following the end of the relevant reportable period. This retention period allows the FTA to audit entities and verify compliance as needed.
Penalties and Refunds
Any Licensee facing administrative penalties for ESR non-compliance with the ESR during any of the financial years starting after the ESR Period (2019-2022) may benefit from penalty cancellations. The Federal Tax Authority (FTA) has committed to refunding amounts paid for such penalties.
Final Thoughts
The discontinuation of ESR obligations for financial years starting from January 1, 2023 onwards provides a welcome reduction in regulatory burden for UAE Businesses. However, licensees must still ensure compliance for the ESR Period (2019-2022) and retain supporting documents as required by the FTA. Free Zone Persons, in particular, should remain vigilant in maintaining adequate substance to secure their tax benefits.
