UAE Eliminates Economic Substance Regulations Post-2022

What Businesses Need to Know Moving Forward

With the introduction of the UAE Federal Corporate Tax (CT) Law, the UAE Ministry of Finance has implemented significant changes aimed at simplifying compliance requirements for businesses. Most notably, Cabinet Resolution No. (98) of 2024 officially brings an end to the Economic Substance Regulations (ESR) for financial years commencing after December 31, 2022.

The ESR was originally introduced to uphold the UAE’s commitment as a member of the OECD Inclusive Framework on BEPS (Base Erosion and Profit Shifting) and to address concerns raised by the European Union about tax transparency. These regulations required certain UAE entities to demonstrate an adequate economic presence in the country, ensuring alignment with international tax practices. The ESR played a key role in the UAE’s removal from the EU Blacklist in 2019, signaling the country’s dedication to global tax standards and cooperation.

This recent resolution aligns with the UAE's new corporate tax regime, streamlining obligations and shifting the focus to corporate tax compliance while maintaining adherence to international tax laws.

Significant Revisions Under Cabinet Resolution No. (98) of 2024:

• Cancellation of ESR Obligations: UAE entities that previously fell under the Economic Substance Regulations (ESR) are no longer required to submit ESR notifications and reports for financial years ending after December 31, 2022. The regulations will now apply only to financial years from January 1, 2019, to December 31, 2022.
• Waiver of Administrative Penalties: Administrative fines for non-compliance with ESR for periods after December 31, 2022, have been waived. Businesses that have paid fines during this period may request a refund, with further guidance to be provided by the Federal Tax Authority (FTA).

Reasons for Regulatory Adjustments

The Economic Substance Regulations (ESR) were initially implemented as a temporary measure to align with international tax standards until the establishment of the UAE’s corporate tax framework. With the introduction of the UAE Corporate Tax Law, which encompasses economic substance requirements, the ESR is now deemed unnecessary.

Federal Corporate Tax (“CT”) regime considerations

Even though ESR (Economic Substance Regulations) no longer apply for financial years starting on or after 1 January 2023, UAE free zone entities and branches (Free Zone Persons) still need to meet certain substance requirements to qualify for the 0% Corporate Tax (CT) rate.

To qualify as a Qualifying Free Zone Person and receive the 0% CT rate, Free Zone entities must:?

1. Conduct Core Income Generating Activities (CIGAs) in a Free Zone.

2. Maintain sufficient assets, hire enough full-time qualified employees in the Free Zone, and have adequate operational expenses.

The level of substance required depends on the size and type of business. As such, companies need to ensure they continue to meet substance requirements to comply with UAE corporate tax laws.

Next Steps for UAE Businesses

While ESR obligations have been cancelled for periods post-2022, businesses must maintain proper documentation for fiscal years starting between January 1, 2019, and December 31, 2022, as the FTA continues to audit these submissions. Additionally, entities should remain vigilant as they transition to the UAE Corporate Tax regime, ensuring compliance with the new regulations.

Core Takeaways:

1. No more ESR filings for financial years beginning after January 1, 2023.
2. Penalties for non-compliance with ESR for periods after December 31, 2022, will be refunded.
3. Businesses must ensure proper documentation for fiscal years where ESR applied, as audits will continue.
4. Free zone entities should review their operational structure to ensure it aligns with other UAE tax compliance standards (i.e., UAE Federal Corporate Tax).
5. Focus will now shift to compliance with the UAE Corporate Tax regime, which incorporates similar substance requirements.

As the regulatory landscape evolves, businesses in the UAE should stay informed and prepared to adapt to the ongoing changes in compliance and tax frameworks. With the cancellation of ESR, companies can now streamline their focus on the UAE Corporate Tax regime and ensure they are fully aligned with the latest regulations.

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