Key changes in the UAE Economic Substance Regulations (ESR)

Since 2019, the Economic Substance Regulations have required certain “Relevant Activities” to demonstrate real economic substance in the UAE (CIGA, adequate local substance, and directed & managed). In 2024, material amendments were introduced to streamline compliance and align ESR with the corporate tax regime. This overview explains the updates and the practical actions to take.

Refresher: purpose and tests

Established under international commitments (OECD/EU), ESR applies to entities performing Relevant Activities (e.g., distribution & service centre, headquarters, IP, financial services, leasing). The three core tests:

• CIGA conducted in the UAE;
• Adequate local substance (people, premises, operating expenditure);
• Directed & managed in the UAE (board meetings, minutes, effective decision making).

What has changed

• No ESR notification/reporting for financial years ending after 31 December 2022.
• Cancellation of administrative penalties for years ending after 31 December 2022, with potential refunds via the MOF portal.
• Time scope: ESR remains applicable to 2019–2022; beyond that, corporate tax compliance takes priority.
• Free Zone entities: to benefit from a 0% corporate tax rate, substance must still be demonstrated (people, assets, expenditure) within the Free Zone.

Practical implications

• ESR audits for 2019–2022: the FTA retains an audit window of roughly six years; expect more focused activity.
• Retention: keep ESR support for six years after each reportable period (CIGA, headcount, leases, minutes).
• Refunds: check eligibility and submit refund requests for penalties wrongly paid.
• Post2022 filings: if you filed by caution, follow authority clarifications; filings may be disregarded.

Coordination with corporate tax

The corporate tax regime has shifted the compliance focus to tax substance: value chain, functions/risks, intercompany agreements and transfer pricing. For Free Zone entities seeking the 0% rate, substance remains critical (qualified personnel, dedicated assets, and local spend).

Action checklist

1. Close out ESR 2019–2022: confirm notifications/reports are complete and audit ready.
2. Refresh mapping of Relevant Activities and related documentation (CIGA, governance).
3. Review penalties paid post2022 and request refunds where applicable.
4. Align substance and CT: intercompany contracts, TP policies, and governance.
5. Free Zones: evidence the incentive criteria (people, assets, expenditure, substance).

What to keep on file

• CIGA evidence (activity reports, contracts, deliverables);
• Personnel, lease and local spend records;
• Board minutes and delegations showing UAE control;
• TP schedules and intercompany agreements;
• Correspondence with authorities.

The updates reduce recent ESR burdens while preserving substance expectations for 2019–2022 and FreeZone incentives. Businesses should secure their historic files, seek available refunds, and concentrate governance on tax substance under corporate tax and TP rules.

Our lawyers, who are experts in tax law, are available to answer all your questions and provide advice. We offer face-to-face meetings or videoconferencing. You can make an appointment directly online at https://www.agn-avocats.fr/.

AGN AVOCATS – Tax Law
contact@agn-avocats.fr
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