UAE Economic Substance Regulations (ESR), issued under Cabinet Resolution No. 57 of 2020, require UAE businesses that earn income from certain “Relevant Activities” to demonstrate genuine economic substance in the UAE. Failure to comply results in fines of AED 50,000–400,000.
Relevant Activities Under UAE ESR
- Banking business
- Insurance business
- Investment fund management business
- Lease-finance business
- Headquarters business
- Shipping business
- Holding company business
- Intellectual property business
- Distribution and service centre business
Who Is Exempt from ESR?
UAE government entities, UAE investment funds, UAE-resident businesses that are sole proprietorships, and businesses where the entire income is subject to UAE corporate tax at the standard 9% rate are generally exempt from ESR requirements. Free zone companies subject to 0% QFZP tax but with relevant activities are still subject to ESR.
What Counts as Sufficient Economic Substance?
To satisfy the economic substance test, a UAE business must: conduct its core income-generating activities (CIGA) in the UAE, be directed and managed from the UAE (board meetings held in UAE), have an adequate number of qualified UAE-based employees, incur adequate operating expenditure in the UAE, and have physical assets in the UAE.
ESR Reporting Deadline
UAE businesses must file an ESR notification within 6 months of their financial year end, and an ESR report within 12 months of their financial year end. Most UAE companies have a December 31 financial year end, meaning notifications are due June 30 and reports December 31 each year.
Penalties for Non-Compliance
| Violation | Penalty (AED) |
|---|---|
| Failure to file ESR notification | 20,000 |
| Failure to file ESR report | 50,000 |
| Failure to meet substance test | 50,000 (year 1); 400,000 (subsequent years) |
| Providing false information | 50,000 |