UAE ESR 2026: Cancelled for FY 2023+ — What Businesses Need to Know

The UAE Economic Substance Regulations (ESR) were introduced under Cabinet Resolution No. 31 of 2019 and revised by Cabinet Resolution No. 57 of 2020 and Ministerial Decision No. 100 of 2020. The regulations required UAE entities carrying out specific categories of commercial activity to demonstrate genuine economic presence in the UAE.

In October 2024, the Ministry of Finance announced that the ESR filing framework had been cancelled for financial years ending after 31 December 2022 — aligned with the introduction of UAE Corporate Tax under Federal Decree-Law No. 47 of 2022. This guide explains the current position, what has changed, what historic obligations may remain, and what substance requirements now apply under the Corporate Tax regime. Reviewed by Jashvantkumar Prajapati of Avyanco Group, a licensed UAE tax professional with 21+ years of experience advising on compliance and structuring.

"The ESR cancellation removed a significant compliance burden for UAE businesses — but it has not removed the concept of substance entirely. Qualifying Free Zone entities seeking the 0% Corporate Tax rate still need to demonstrate adequate substance within their free zone. The obligation has moved regimes, not disappeared."

— Jashvantkumar Prajapati, Business Structuring Specialist, Avyanco Group

What Cabinet Decision No. 98 of 2024 Changed

On 14 October 2024, the Ministry of Finance announced the cancellation of ESR filing requirements via Cabinet Decision No. (98) of 2024, which amends provisions of Cabinet Decision No. (57) of 2020. The key changes:

What ESR Was: Background

ESR was introduced in response to OECD and EU pressure on low-tax jurisdictions to demonstrate that entities incorporated in their territory genuinely conduct business there. Businesses carrying out one of nine Relevant Activities were required to show adequate employees, premises, and core operations in the UAE — not just a registered address.

The nine Relevant Activities subject to ESR were: Banking, Insurance, Investment Fund Management, Lease-Finance, Headquarters Business, Shipping, Holding Company Business, Intellectual Property Business, and Distribution and Service Centre Business.

With the introduction of UAE Corporate Tax at 9% from June 2023 — one of the primary international transparency concerns that ESR was designed to address — the UAE had effectively adopted a global standard tax regime. The rationale for a parallel substance framework fell away, and Cabinet Decision No. 98 of 2024 formally ended it.

Historic ESR Obligations: Financial Years 2019–2022

If your entity carried out a Relevant Activity and has not yet fulfilled its ESR obligations for any financial year between 2019 and 2022, those obligations remain outstanding. The cancellation does not retroactively remove the duty to file for those periods.

Substance Requirements That Still Apply: Corporate Tax

Although ESR has been cancelled, substance requirements have not disappeared entirely. Under the UAE Corporate Tax regime, Qualifying Free Zone Persons (QFZPs) seeking the 0% Corporate Tax rate on qualifying income must demonstrate adequate substance within their free zone. These requirements are separate from — and unaffected by — the ESR cancellation.

To maintain QFZP status, a free zone entity must:

• Conduct its Core Income-Generating Activities (CIGAs) within the free zone (or within the UAE, if certain conditions are met)
• Maintain adequate assets within the free zone
• Have adequate full-time employees or incur adequate operating expenditure in relation to those activities within the free zone
• Not earn income from activities that are excluded from qualifying income
• Maintain audited financial statements

The QFZP substance test is administered under Federal Decree-Law No. 47 of 2022 and the associated Ministerial Decisions — not under ESR. Failure to maintain adequate substance results in loss of QFZP status and the 9% standard CT rate applying to all income for that tax period.

ESR Cancellation and Corporate Tax: The Connection

The ESR was always intended as a temporary measure to satisfy international transparency obligations during a period when the UAE had no corporate income tax. The introduction of Corporate Tax at 9% under Federal Decree-Law No. 47 of 2022 — itself a response to the OECD's global minimum tax framework — addressed the underlying concern directly.

The UAE's position is now governed by the international standard Corporate Tax framework rather than a parallel substance-monitoring regime. Businesses that previously spent resources on ESR compliance should redirect that effort toward Corporate Tax registration, annual CT return filing, and — for free zone entities — maintaining QFZP substance under the CT rules.

5 Key Questions Businesses Are Asking About ESR Cancellation

1. Do we need to file an ESR Notification for our 2024 financial year? No. ESR Notifications and Reports are not required for any financial year ending after 31 December 2022. Your 2024 filing obligation is a Corporate Tax return — not an ESR filing.
2. We filed ESR for 2023 and paid a penalty. Will we be refunded? Yes. Cabinet Decision No. 98 of 2024 cancelled all ESR penalties for financial years ending after 31 December 2022, and committed to refunding penalties already paid. Contact your regulatory authority or the FTA to confirm the status of your refund.
3. Our 2022 ESR Report was never filed. Is it still outstanding? Yes. ESR obligations for financial years 2019–2022 were not cancelled and remain enforceable. If you carried out a Relevant Activity during those years and did not file, seek advice immediately — penalties for those periods still stand.
4. We are a DMCC free zone company pursuing 0% Corporate Tax. Has substance gone away? No. QFZP substance requirements under the Corporate Tax law are separate from ESR and remain in force. You must still demonstrate adequate assets, employees, and CIGA conduct within your free zone to qualify for the 0% rate on qualifying income.
5. Should we still keep our ESR compliance records? Yes. Despite the cancellation of filing obligations for FY 2023+, Cabinet Decision No. 98 of 2024 requires entities to retain all ESR-related documents for at least 6 years from the relevant reporting period. Destroy them early and you risk being unable to respond to a future information request.

Frequently Asked Questions

Is UAE ESR completely cancelled?

ESR filing obligations — the annual Notification and Report — have been cancelled for all financial years ending after 31 December 2022, per Cabinet Decision No. (98) of 2024 effective 2 September 2024. The ESR framework remains technically in place for the 2019–2022 historic period, but no new filings will be required going forward. The Ministry of Finance announced this change on 14 October 2024, citing the alignment of UAE tax policy with international standards following the introduction of Corporate Tax.

We are a free zone company. Do we still need to worry about substance after ESR was cancelled?

Yes — but under a different regime. If your free zone entity claims Qualifying Free Zone Person (QFZP) status to access the 0% Corporate Tax rate on qualifying income, you must maintain adequate substance within your free zone under the Corporate Tax law (Federal Decree-Law No. 47 of 2022). The QFZP substance test requires adequate assets, qualified full-time employees, and core income-generating activities conducted within the free zone. Failing the QFZP substance test means the 9% CT rate applies to all your income for that tax period.

Our entity had ESR obligations for 2022 that we never fulfilled. What should we do?

The cancellation under Cabinet Decision No. 98 of 2024 does not remove obligations for financial years 2019–2022. If your entity carried out a Relevant Activity during those years and did not file the required Notification or Report, those obligations remain outstanding and subject to penalties. Speak to a licensed UAE tax adviser immediately. The penalties for missing ESR filings in those years — AED 20,000 for a missing Notification, AED 50,000 for a missing Report — were not cancelled for the 2019–2022 period.

How long must we keep ESR compliance documents?

Cabinet Decision No. 98 of 2024 specifically requires entities to retain all documentation supporting their ESR compliance for a minimum of 6 years from the relevant financial year-end, even though filing obligations have been cancelled. This includes board meeting minutes, employee records, financial statements, contracts proving UAE operating expenditure, and any correspondence with regulatory authorities. The FTA and Ministry of Finance retain the right to request these documents.

We were fined for ESR non-compliance in 2023. Will we get a refund?

Yes. Cabinet Decision No. 98 of 2024 cancelled all ESR administrative penalties imposed for financial years ending after 31 December 2022, and committed to refunding any such penalties already paid. Contact your regulatory authority (your free zone, or the Ministry of Finance for mainland entities) to confirm the refund process and timeline for your specific case. Processing timelines vary by authority.

Why did the UAE cancel ESR?

ESR was introduced in 2019 as a targeted response to OECD and EU concerns that UAE entities lacked genuine economic substance despite operating in a no-tax jurisdiction. The introduction of UAE Corporate Tax at 9% from June 2023 addressed the underlying concern directly — the UAE was no longer a zero-tax jurisdiction in the traditional sense. With a proper corporate tax framework in place and active participation in the OECD's international tax transparency standards, the parallel substance-monitoring regime was no longer necessary and was formally retired.

We hold intellectual property in a UAE entity. Does ESR cancellation affect our position?

The ESR requirement to demonstrate UAE substance for an IP Business has been cancelled for FY 2023 onwards. However, if your IP entity is a free zone entity claiming QFZP status for 0% Corporate Tax on qualifying IP income, you still need to meet the QFZP substance requirements under the CT law. Additionally, if your IP holding structure involves related-party transactions, UAE transfer pricing documentation requirements (under Federal Decree-Law No. 47 of 2022 and Ministerial Decision No. 97 of 2023) may be relevant. Review your structure with a qualified UAE tax adviser.

Should we still work with a tax adviser on ESR?

For historic 2019–2022 periods where filings were missed, yes — urgently. For 2023 and beyond, the focus shifts to Corporate Tax compliance: registration, annual return filing, and (for free zone entities) QFZP substance. Jashvant's team at Avyanco advises on historic ESR rectification, QFZP substance assessment, and ongoing CT compliance for mainland and free zone entities across the UAE.

Related Tax & Compliance Guides

• UAE Tax & Compliance Overview: Corporate Tax, VAT, ESR and FTA
• UAE VAT Registration: Thresholds, Process & Penalties
• FTA EmaraTax Registration: Corporate Tax and VAT Setup
• UAE Business Setup: Free Zone vs Mainland
• Free UAE Business Setup Cost Calculator

This guide reflects Cabinet Decision No. (98) of 2024 which cancelled ESR filing obligations for financial years ending after 31 December 2022. UAE tax law is subject to amendment — verify current requirements at mof.gov.ae before making compliance decisions. This guide is for general information only and does not constitute legal or tax advice.