In short
- ESR covers financial years from 1 January 2019 to the one ending 31 December 2022.
- A company formed after 2022 files no ESR notification and no report.
- For 2019 to 2022 the fines stand: AED 20,000, AED 50,000 and AED 400,000 for a repeat.
In this guide
Is ESR still applicable in the UAE?
No, not for a financial year that ended after 31 December 2022. Cabinet Resolution No. 98 of 2024, which the Ministry of Finance also calls Cabinet Decision No. 98, was issued on 2 September 2024 and took effect that day. It added Article 2 bis to the regulations: they apply to financial years that began on or after 1 January 2019, up to and including the year ending on 31 December 2022.
The same resolution cancelled every administrative penalty imposed for a financial year ending after 31 December 2022. Where such a penalty was paid, the Federal Tax Authority (FTA) refunds it and closes the appeal.
| Your company | What it files under ESR |
|---|---|
| Formed in 2023 or later: free zone, mainland or offshore | Nothing: no notification, no report, no substance test |
| Formed earlier, no relevant activity in 2019 to 2022 | Nothing for those years |
| Formed earlier, relevant activity in 2019 to 2022 | A notification for each such year and a report for each year with income from it |
The cut-off follows the year end. A financial year from 1 July 2022 to 30 June 2023 is outside the regulations, although it began in 2022.
The federal portal's ESR page, updated on 22 May 2025, still describes yearly filings. The Ministry of Finance confirmed the cut-off on 14 October 2024.
The same rule covers an offshore company in RAK ICC or JAFZA. What such a company holds and files each year is on offshore company formation in Dubai and the UAE.
What the Economic Substance Regulations were and which years they covered
The regulations asked a UAE company with income from certain mobile activities to show real activity in the country. The UAE adopted them as a member of the OECD Inclusive Framework, after the European Union's Code of Conduct Group assessed its tax system.
Cabinet Resolution No. 31 of 2019 introduced them on 30 April 2019, for financial years starting on or after 1 January 2019. Resolution No. 57 of 2020 replaced it on 10 August 2020 and made the FTA the assessing authority. Ministerial Decision No. 100 of 2020 added the guidance.
The Ministry of Finance tied the end to corporate tax, which applies to tax periods starting on or after 1 June 2023.
Which of your financial years are covered
| Year end | Years in scope | Last notification was due | Last report was due |
|---|---|---|---|
| 31 December | 2019 to 2022 | 30 June 2023 | 31 December 2023 |
| 30 June | Years ending 30 June 2020 to 2022 | 31 December 2022 | 30 June 2023 |
| 31 March | Years ending 31 March 2020 to 2022 | 30 September 2022 | 31 March 2023 |
Who was in scope: the nine relevant activities
A company fell under the regulations in each year in which it carried on one of nine relevant activities, whatever its license said.
- Banking
- Insurance
- Investment fund management
- Lease-finance
- Headquarters services to group companies abroad
- Shipping
- Holding company business: the sole function is to hold shares, and the income is dividends and capital gains
- Intellectual property business
- Distribution and service centre business: reselling goods bought from a group company abroad, or serving group companies abroad
Holding companies and distribution and service centres caught foreign-owned companies most often. An offshore company was in scope like a free-zone or a mainland one, the Ministry of Finance stated. One dirham of income from a relevant activity brought the report and the test.
Four kinds of company filed the notification, with proof of their status, and no report:
- an investment fund
- a company tax resident in another country
- a company wholly owned by UAE residents, outside any multinational group, with business in the UAE alone
- a UAE branch whose income from the activity was taxed abroad
The Economic Substance Test, the notification and the report
A company with income from a relevant activity had to meet the Economic Substance Test for that year, in three parts:
- The core income-generating activities took place in the UAE.
- The activity was directed and managed in the UAE: the board met here often enough, a quorum of directors was physically present, and the signed minutes stayed here.
- The company had an adequate number of qualified full-time employees, adequate operating expenditure and adequate physical assets in the UAE.
The regulations gave no figures for adequate. A pure holding company met a reduced test: it made the filings its registry required and had adequate people and premises to hold the shares. An intellectual property company that bought its rights from the group and licensed them back was presumed to fail unless it proved the opposite.
Two filings went through the Ministry of Finance ESR portal, in English. Every company with a relevant activity, exempt ones included, filed a notification within six months of the year end. A company that earned income from the activity and was not exempt filed the Economic Substance Report within twelve months, with financial statements that did not have to be audited.
We do this for you Offshore company formation in Dubai and the UAE from $3,000
ESR penalties for 2019 to 2022 and the FTA's time limits
| Failure | Penalty |
|---|---|
| Notification not filed | AED 20,000 |
| Report not filed, or the test not met | AED 50,000 |
| The same failure in the following year | AED 400,000, and the license may be suspended, withdrawn or not renewed |
| Inaccurate information, knowingly given | AED 50,000 |
After a failed test the Ministry of Finance also sends the company's file to the tax authority of the country where its parent, ultimate parent and beneficial owner live.
The FTA assesses and fines. It may find that a company failed the test up to six years after the end of the financial year and may impose a penalty up to six years after the breach. A company that misled the authority has no such limit.
| Year ending 31 December | The FTA may assess the test until |
|---|---|
| 2019 | 31 December 2025, already passed |
| 2020 | 31 December 2026 |
| 2021 | 31 December 2027 |
| 2022 | 31 December 2028 |
The FTA's notice sets the date a penalty is due, 30 business days or more after it. An appeal goes through the ESR dashboard on the Ministry of Finance website, on three grounds: no breach, a penalty out of proportion, or one above the set amount.
ESR compliance in the UAE for the years 2019 to 2022, step by step
- List your financial years that began on or after 1 January 2019 and ended by 31 December 2022.
- For each, write down what the company did: held shares, licensed rights, or sold goods or services to group companies abroad.
- On the Ministry of Finance ESR portal, check for a notification for each year with a relevant activity and a report for each year with income from it.
- File what is missing. The duty for these years stands, the Ministry's ESR page still links the portal, and a late filing can still be fined.
- Answer a notice from your registry or the FTA in the time it sets, and pay a penalty by its date or appeal.
- For a fine on a year that ended after 31 December 2022, ask the FTA to cancel and refund it under Article 2 of Resolution 98.
- Keep the filings, board minutes, leases and payroll records for six years after each submission.
The resolution orders the refund and names no form for it. For a penalty overturned on appeal, the Ministry's ESR questions and answers name the e-refund service on its website, with the payment receipt and the case number.
What still asks for substance in the UAE in 2026
The 0% free-zone rate
The corporate tax law names substance as a condition once, in Article 18. A free-zone company pays 0% on qualifying income as a Qualifying Free Zone Person, and adequate substance is the first condition. A company on the standard rates, 0% up to AED 375,000 of taxable income and 9% above, passes no substance test.
Article 8 of Cabinet Decision No. 100 of 2023 defines the condition. The company carries out its core income-generating activities in a free zone, with adequate assets, qualified full-time employees and operating expenditure there. Under Ministerial Decision No. 229 of 2025 a company that fails loses the 0% rate for that tax period and the next four.
The wording is that of the old test, with the free zone in place of the whole UAE. No separate report exists: the company claims the rate in its yearly tax return.
For a holding company the FTA gives an example. A free-zone company that holds shares, with a small office in the zone and no employees, meets the condition when its board decides in the zone and the minutes show it. The other conditions are in who is a Qualifying Free Zone Person, and the registration and the return on corporate tax registration in the UAE.
Article 50, the general anti-abuse rule, also lets the FTA undo a tax advantage from an arrangement that has no valid commercial reason reflecting economic reality.
The tax residency certificate and treaty relief
A company incorporated in the UAE is tax resident here under Cabinet Decision No. 85 of 2022, and the FTA's guide treats an offshore company in the same way. For the certificate the company must have been incorporated for 12 months. The FTA's document list names a valid license, a lease agreement and the memorandum of association, with proof of effective management and control in the UAE where it applies. An offshore company has a certificate of incorporation and no license or lease of its own.
A certificate for a treaty is issued under Ministerial Decision No. 247 of 2023 and follows that treaty's test of a UAE resident. The treaty with India accepts a company incorporated in the UAE and managed and controlled wholly in the UAE, and refuses one created mainly to obtain its benefits. Other treaties' tests are in UAE double tax treaties.
The bank
The Central Bank's guidance calls a company with no significant operations a shell company and names two signs: no employees and no physical presence. From a higher-risk customer a bank may require invoices, payroll records, proof of a valid license and the Economic Substance Report, or visit the premises. A company formed after 2022 has no such report and answers with Article 2 bis, its lease, its staff and its contracts. The file is described in how to open a business bank account in the UAE.
A company formed today: what it files in place of ESR
| Duty | Free zone | Mainland | Offshore |
|---|---|---|---|
| ESR notification and report | None | None | None |
| Corporate tax registration | 3 months from incorporation | 3 months | 3 months |
| Corporate tax return | 9 months from the year end | 9 months | 9 months |
| Substance test for tax | For the 0% rate alone | None | None at the standard rates |
| Register of beneficial owners | Updated within 15 days of a change | 15 days | 15 days |
We form the company, file its tax registration and its register of owners, and keep the dates in your account. A company that will hold shares or property starts as an offshore company in the UAE, registered in RAK ICC or JAFZA. For one that needs the 0% rate or a tax residency certificate, we plan the office and the board meetings before it is formed.
