Somebody is probably still trying to sell you an ESR filing. Several service providers continue to advertise annual “Economic Substance Report” packages, and some company owners keep paying for them. Here is the short answer: standalone ESR notifications and reports were cancelled for financial years ending after 31 December 2022. If you are paying for one for 2023, 2024 or 2025, stop and read this first.
- Cabinet Decision No. 98 of 2024 ended ESR filings for financial years ending after 31 Dec 2022.
- ESR only ever applied to 2019 to 2022. Those years can still be audited, with no amnesty.
- ESR penalties for later years were cancelled, and amounts already paid are refundable through the FTA.
- The substance idea moved into corporate tax: fail the Qualifying Free Zone Person (QFZP) test and you lose the 0% rate and pay 9%.
What actually happened to ESR
The UAE introduced Economic Substance Regulations in 2019 after pressure from the EU and the OECD. Companies carrying on a “relevant activity” (banking, insurance, fund management, headquarters, shipping, holding company, IP, distribution and service centre business, among others) had to file a notification and an annual report proving real activity in the country. Cabinet Decision No. 98 of 2024, announced by the Ministry of Finance in October 2024, withdrew that regime for any financial year ending after 31 December 2022. The federal corporate tax law, which started applying from 2023, now carries its own substance conditions, so a parallel system was no longer needed.
ESR status by year: a quick table
| Financial year | ESR filing required? | What to do |
|---|---|---|
| 2019 to 2022 | Yes (historical) | Check you filed. Unfiled years can still be penalised. |
| 2023 onward | No | No ESR report. Any ESR fine paid for these years is refundable. |
| 2023 onward, free zone company claiming 0% | No ESR, but substance still tested | Prove QFZP conditions in your corporate tax return. |
Where “substance” lives now: the QFZP test
The risk did not disappear, it moved. A free zone company that wants the 0% corporate tax rate on qualifying income has to show it is a genuine operation, not a mailbox. In practice that means adequate assets, qualified employees and operating expenditure in the free zone, and core income-generating activities carried out in the UAE. It also means keeping audited financial statements and staying inside the de minimis limit for non-qualifying income (the lower of 5% of revenue or AED 5 million).
| Point | Old ESR regime | QFZP substance test (today) |
|---|---|---|
| Who it hits | Companies in listed relevant activities | Free zone companies claiming 0% |
| What you file | Separate notification and report | Evidence inside your corporate tax return |
| Cost of failing | Administrative fines | Loss of 0% status, taxed at 9% |
Losing QFZP status is usually far more expensive than any old ESR fine. For a free zone business with AED 2 million of qualifying profit, the swing from 0% to 9% is roughly AED 180,000 a year (the first AED 375,000 of taxable income remains at 0%, so the real figure depends on your numbers). Our guide on whether you actually qualify for 0% corporate tax walks through the full test, and our piece on free zone audit requirements covers the audit condition.
What about offshore companies?
The same logic applies. An offshore or holding structure no longer has a separate ESR filing to budget for. Our guide to UAE offshore companies covers what these entities can and cannot do, and we have corrected the cost section there to remove the old ESR line item.
Your 5-minute action list
- Stop any ESR filing subscription for financial years ending after 31 December 2022, and ask your provider in writing what you were charged for.
- Check 2019 to 2022. If you had a relevant activity and never filed, get advice before the FTA asks.
- Claim refunds. If you paid an ESR fine for a post-2022 year, ask the FTA to refund it.
- If you are a free zone company, document your substance now: lease, staff, payroll, local spend and where income-generating work happens.
FAQ
Is ESR still required in the UAE in 2026? No. Standalone ESR notifications and reports no longer apply for financial years ending after 31 December 2022.
Can the FTA still penalise me for missing ESR in 2021? Yes. The 2024 decision did not give a retroactive amnesty for 2019 to 2022.
Does substance still matter? Yes. It is now a condition of the 0% QFZP rate under the corporate tax law.
Official sources: UAE Ministry of Finance and the Federal Tax Authority. Not sure whether your structure still has exposure? Talk to the BizDaddy team before your next filing.
