{"id":130,"date":"2026-10-21T05:35:00","date_gmt":"2026-10-21T05:35:00","guid":{"rendered":"https:\/\/vivosgroup.com\/ae\/?p=130"},"modified":"2026-10-05T08:13:16","modified_gmt":"2026-10-05T08:13:16","slug":"uae-economic-substance-regulations-status","status":"publish","type":"post","link":"https:\/\/vivosgroup.com\/ae\/insights\/uae-economic-substance-regulations-status\/","title":{"rendered":"UAE Economic Substance Regulations in 2026: Do They Still Apply?"},"content":{"rendered":"\n
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Insights \u00b7 UAE Compliance<\/p>\n\n\n\n

UAE Economic Substance Regulations in 2026: Do They Still Apply?<\/h1>\n\n\n\n

Only for past years. Cabinet Decision No. 98 of 2024 limits the UAE\u2019s Economic Substance Regulations to financial years from 1 January 2019 to 31 December 2022. For financial years ending after 31 December 2022, there is no ESR notification, report or substance test, and ESR penalties imposed for those years are cancelled and refunded by the Federal Tax Authority. The 2019 to 2022 years stay open: the FTA can assess each one for six years after its end, with fines from AED 20,000 to AED 400,000.<\/p>\n\n\n\n

This guide is for directors and finance leads of UAE holding companies, regional headquarters and free zone entities that filed, or should have filed, ESR returns. It explains what ended, what still applies to 2019 to 2022 and where substance is tested under corporate tax.<\/p>\n<\/div>\n\n\n\n

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Rule<\/th>Position at 2 October 2026<\/th><\/tr>
Legal basis<\/td>Cabinet Decision No. 57 of 2020, amended by Cabinet Decision No. 98 of 2024<\/td><\/tr>
Years in scope<\/td>Financial years from 1 January 2019 to 31 December 2022 only<\/td><\/tr>
Years ending after 31 December 2022<\/td>No notification, no report and no economic substance test<\/td><\/tr>
Penalties for those later years<\/td>Cancelled; amounts already paid to be refunded by the FTA<\/td><\/tr>
2019 to 2022 obligations<\/td>Notifications, reports and the substance test still apply; FTA requests must be answered<\/td><\/tr>
Assessment window<\/td>Six years from the end of each financial year<\/td><\/tr>
Fines for 2019 to 2022<\/td>AED 20,000 (no notification); AED 50,000 (no report or failed test); AED 400,000 (repeat failure)<\/td><\/tr>
Substance today<\/td>Qualifying Free Zone Person conditions under the Corporate Tax Law<\/td><\/tr><\/tbody><\/table><\/figure>\n<\/div>\n\n\n\n
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What Cabinet Decision No. 98 of 2024 Changed<\/h2>\n\n\n\n

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.<\/p>\n\n\n\n

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 \u201cfor financial years ending after 31 December 2022\u201d. 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.<\/p>\n\n\n\n

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.<\/p>\n<\/div>\n\n\n\n

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Open Years, Free Zone Substance and Transfer Pricing<\/h2>\n\n\n\n

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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

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\u2019s 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.<\/p>\n<\/div>\n\n\n\n

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Practical Steps for Former ESR Filers<\/h2>\n\n\n\n