UAE Economic Substance Regulations in 2026: Do They Still Apply?

What Cabinet Decision No. 98 of 2024 Changed

The Economic Substance Regulations, set out in Cabinet Decision No. 57 of 2020, applied from financial years starting on or after 1 January 2019. Any UAE licensee earning income from a relevant activity had to show that it ran its core income-generating activities in the UAE. The activities were banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding company, intellectual property, and distribution and service centre business. Licensees filed an annual notification and, where required, an economic substance report within 12 months of the financial year end. The Federal Tax Authority assessed compliance and imposed the penalties.

Cabinet Decision No. 98 of 2024, dated 2 September 2024 and announced by the Ministry of Finance on 14 October 2024, confined the regime to financial years from 1 January 2019 to 31 December 2022. The Ministry described it as cancelling reporting requirements “for financial years ending after 31 December 2022”. A company with a 30 June year end therefore had no ESR filing for the year ended 30 June 2023. The Ministry linked the change to federal corporate tax, which applies to financial years starting on or after 1 June 2023.

For the later years, the decision cancels every administrative penalty imposed under the regulations, and the FTA must refund penalties already paid. Related appeals are to be closed. The decision does not set out a claim procedure, and advisers differ on whether refunds are paid automatically. A business that paid an ESR penalty for a 2023 or later year and has not been repaid should write to the FTA with the penalty notice, proof of payment and the financial year concerned. Nothing in the decision affects penalties for 2019 to 2022.

Open Years, Free Zone Substance and Transfer Pricing

The repeal does not reach back. Licensees in a relevant activity from 2019 to 2022 still had to notify, report and meet the test, and the Ministry of Finance says they must still answer information or amendment requests and pay any penalties imposed. The FTA can assess a year within six years of its end, so on a calendar year end 2020 stays open until 31 December 2026 and 2022 until 31 December 2028. Fines are AED 20,000 for a missing notification and AED 50,000 for a missing report, a failed test or knowingly inaccurate information. A repeat failure the next year costs AED 400,000, and the licence can be suspended or not renewed.

Substance now matters mainly for free zone companies claiming the 0% corporate tax rate as a Qualifying Free Zone Person. Article 8 of Cabinet Decision No. 100 of 2023 requires core income-generating activities to be carried out in a free zone or designated zone, with adequate assets, an adequate number of qualified full-time employees and adequate operating expenditure. Outsourcing is allowed only to another person in a free zone or designated zone, with adequate supervision. Unlike ESR, this is not a separate filing. It is a condition of the 0% rate, and a company that fails it loses that rate.

Transfer pricing is a third, separate test. Articles 34 to 36 of the Corporate Tax Law require dealings with related parties and connected persons to be at arm’s length. A disclosure form is filed with the return, and larger businesses keep a master file and local file under Ministerial Decision No. 97 of 2023. A Qualifying Free Zone Person must comply to keep its 0% rate. ESR asked whether the activity happened in the UAE. Transfer pricing asks whether the profit booked there matches the functions, assets and risks. A thin UAE entity with high intra-group margins is therefore still exposed.

Practical Steps for Former ESR Filers

• List every UAE entity that carried on a relevant activity in any financial year from 2019 to 2022, and confirm each notification and report was filed.
• Where a filing is missing, take advice now, as the FTA can still assess the open years and impose fines.
• Check whether any ESR penalty was paid for a financial year ending after 31 December 2022, and claim the refund from the FTA in writing if it has not arrived.
• Keep filed reports, portal access and the evidence behind each report, such as board minutes, payroll and premises records, until the six-year window for 2022 has closed.
• Expect buyers and banks to ask for these files in due diligence on a UAE holding company or regional headquarters.
• Stop budgeting for ESR filings for 2023 onwards, but keep real substance in any free zone entity that relies on the 0% rate.
• Document free zone staff, premises, spending and core activities each year, and review intra-group pricing before each corporate tax return.