ESR Dubai – Economic Substance Regulation and corporate income tax in the UAE

The Economic Substance Regulations (ESR) in the United Arab Emirates (UAE) were originally introduced to ensure that companies in the Emirates are actually economically active and not merely acting as letterbox companies. The background to this was, in particular, the OECD’s BEPS (Base Erosion and Profit Shifting) project to combat unlawful tax practices.

However, the ESR regime was fundamentally changed with Council of Ministers Resolution No. 98 of 2024. This is because the ESR regulations no longer apply to financial years beginning on or after January 1, 2023. However, the regulations remain relevant for earlier financial years between 2019 and 2022.

For free zone companies in particular, the issue of economic substance nevertheless remains of considerable importance, as comparable requirements continue to exist under the Corporate Income Tax Act and the Qualifying Free Zone Person regulations.

The original ESR regulations were based on Cabinet Decision No. 57 of 2020. Companies carrying out so-called “relevant activities” had to prove that their main income-generating activities were actually carried out in the UAE.

The key requirements included in particular

• Business premises in the UAE
• Staff with actual presence on site
• Strategic management decisions within the Emirates
• Local operating expenses and actual business activity

The aim of this regulation was to prevent artificial profit shifting and to comply with international transparency standards.

The ESR regime was significantly restricted by Council of Ministers resolution no. 98 of 2024. According to the current legal situation, the ESR regulations only apply to financial years from January 1, 2019 to December 31, 2022.

For financial years beginning on or after January 1, 2023, this is generally not applicable:

• the obligation to submit an ISR notification
• the submission of an ISR report
• Formal proof of economic substance in accordance with the ESR rules

Despite the abolition of the ESR from 2023, companies still have important obligations for the historic ESR period 2019-2022.

Companies that were considered “licensees” during this period and carried out relevant activities must continue to do so:

• Submit open ISR notifications
• Submit required ISR reports
• demonstrate sufficient economic substance
• Retain relevant documents

The Federal Tax Authority (FTA) can still check compliance with the ESR requirements retrospectively for up to six years. Companies should therefore continue to secure all documents and access to the ESR portal.

No statutory minimum capital is required for the formation of a Dubai LLC. However, depending on the business model, a reasonable amount of share capital may be required.

The total costs depend in particular on the structure, location and license type:

Resolution no. 98 of 2024 also provides for a reduction in administrative penalties.

If companies have been sanctioned for alleged ESR violations for financial years from 2023 onwards, these penalties are to be lifted. Amounts already paid may be reclaimed via the refund portal of the UAE Ministry of Finance.

Companies should therefore check whether

• Fines were wrongly imposed
• Refund claims exist
• previous ISR submissions have been completed correctly

Even if the formal ESR regulations no longer apply from 2023, proof of economic substance remains highly relevant for tax purposes.

Since the introduction of corporate tax in 2023, free zone companies can continue to benefit from a corporate tax rate of 0% under certain conditions. The prerequisite for this is qualification as a “Qualifying Free Zone Person” (QFZP).

In particular, companies must:

• carry out actual income-generating activities in the free zone
• have sufficient assets
• employ qualified personnel
• demonstrate appropriate operating expenses in the UAE

The requirements are therefore still similar in content to the former ESR substance test, even though the formal ESR reporting obligations have been dropped.

The UAE’s ESR regulations no longer apply for financial years from January 1, 2023. For the period 2019 to 2022, however, there are still verification, reporting and documentation obligations that can be audited by the Federal Tax Authority.

At the same time, economic substance remains a key tax factor for free zone companies in the context of corporate tax and QFZP regulations.

A careful review of the existing corporate structure, previous ESR compliance and current corporate tax requirements is therefore still essential. This applies in particular to companies with cross-border structures under international tax law.

Our law firm TME Legal supports you in the legally compliant design of international corporate structures in the UAE. Our lawyers and tax experts review existing ESR obligations for the years 2019-2022, assist with possible refund procedures and advise on optimal structuring under the current UAE corporate tax regime.

In addition, we support free zone companies in securing sufficient economic substance to maintain QFZP status and the long-term tax optimization of cross-border corporate structures.