Economic substance in the UAE after ESR: what still applies
ESR notifications and reports are no longer required for financial years ending after 31 December 2022. The substance test itself carries on inside corporate tax, most directly in the conditions for the 0% free zone regime.
Following Cabinet Decision No. 98 of 2024, UAE companies no longer file ESR notifications or reports for financial years ending after 31 December 2022. Obligations for earlier years remain: companies must still answer requests from the regulators or the FTA about those years and pay any penalties imposed. Substance itself did not go away. It now sits in the corporate tax rules, above all in the QFZP regime, where a free zone company keeps 0% on qualifying income only if it has adequate substance in a free zone.
- ESR notifications and reports are not required for financial years ending after 31 December 2022 (Cabinet Decision 98/2024).
- Earlier years still count: information requests and any penalties for 2019 to 2022 remain the company’s responsibility.
- A QFZP claiming 0% must have adequate substance in a free zone: staff, premises and spending that match its core income-generating activities.
- The de minimis limit for non-qualifying revenue is the lower of 5% of revenue or AED 5,000,000; exceeding it ends QFZP status for five tax periods.
- Substance is shown through payroll, premises, expenses and audited accounts.
What ESR required and what ended
The Economic Substance Regulations (Cabinet Decision No. 57 of 2020, which replaced Cabinet Decision 31 of 2019) required UAE companies carrying on a “relevant activity” to file an annual notification and, if they earned income from that activity, a substance report. The relevant activities were holding company, intellectual property, banking, insurance, shipping, headquarters, distribution and service centre, lease-finance and investment fund management business.
In October 2024 the Ministry of Finance announced Cabinet Decision No. 98 of 2024, which cancelled ESR notifications and reports for financial years ending after 31 December 2022. The Ministry also said that companies remain responsible for obligations for earlier years, must respond to information or amendment requests from the regulators or the FTA, and must pay any penalties imposed. If a provider offers “annual ESR filing” for a 2024 or 2025 year, ask which rule they mean.
Where substance applies now
Corporate tax, introduced by Federal Decree-Law No. 47 of 2022, carries the substance idea forward in two places.
The first is the QFZP 0% regime. A Qualifying Free Zone Person keeps 0% on qualifying income only if it maintains adequate substance in a free zone: people, premises and spending proportionate to the income it earns there. The second is treaty residence. A company incorporated in the UAE is resident for UAE corporate tax by incorporation, but another country deciding whether to grant treaty benefits will look at where the company is actually managed. Our guide on who pays 0% corporate tax covers the QFZP rules in full, and our corporate tax service covers registration and returns.
Adequate substance for a QFZP
The QFZP conditions are cumulative. Failing any one ends QFZP status from the start of that tax period and for the next four tax periods (Ministerial Decision 229/2025, Art. 5). There is no fixed headcount or floor-area rule; “adequate” is judged against the activity and income of the company.
| Condition | What it means in practice |
|---|---|
| Adequate substance | Staff, premises and operating spending in a free zone that match the core income-generating activities, scaled to the business. |
| Outsourcing | Core income-generating activities may be outsourced to other persons located in a free zone, with adequate supervision (FTA guide CTGFZP1). |
| De minimis | Non-qualifying revenue must not exceed the lower of 5% of total revenue or AED 5,000,000 (MD 229/2025, Art. 3). |
| Audited accounts | Audited financial statements are required for a QFZP, whatever its size. |
| Transfer pricing | Arm’s-length pricing and documentation for related-party and connected-person transactions. |
The weak point is a company with a licence, a flexi‑desk and invoices, claiming 0% on income earned by people working elsewhere. That is the pattern the rules are designed to catch. The corporate tax calculator gives a first estimate of your position.
Substance and tax residency certificates
Under Article 11(3)(a) of the Corporate Tax Law, a company incorporated in the UAE is a resident person. Whether a treaty partner accepts that residence, and grants treaty relief, is a separate question. If directors meet, decide and sign abroad while the UAE company is an address, the other country may argue that the company is managed there.
Board meetings held in the UAE, minutes that record real decisions, a director or manager present in the country and banking run from here all support a residence claim. How the certificate itself is obtained is explained on our tax residency page.
Substance for a small company
A small company does not need a large office. For a small QFZP consultancy or services company the test is proportionality: a place where the work happens, people who do it (employees, or supervised outsourcing to persons in a free zone) and costs that show it. A one-founder company invoicing AED 800,000 needs less than a group booking AED 30 million.
Planning substance from the start
It is cheaper to plan substance before incorporation than to rebuild it after an FTA query. Choose a zone whose activities and costs fit how you actually operate; the Free Zone Index compares all 45. Keep audited books from the first year so that the substance is documented as it builds up.
Companies that treated ESR as a real substance discipline will notice little change. Companies that treated it as a yearly form are the ones exposed, because the 0% now depends on the substance behind it.
Frequently asked
Do I still need to file an ESR notification or report in the UAE?
Was economic substance abolished in the UAE?
What counts as adequate substance for a free zone company?
Can I lose my QFZP 0% rate over substance?
Does substance affect my UAE tax residency certificate?
What replaced ESR in the UAE?
This is general information on UAE rules. It is not legal, tax or immigration advice for your situation. Rules and government fees change; we confirm the position for your facts in writing before you act.