Why Economic Substance Regulations (ESR) Are Not Required for Businesses in the UAE
June 25, 2025
October 8, 2025
June 25, 2025
October 8, 2025
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Topic Summary
1. Regulatory Update Effective from 1 January 2023
The UAE has officially removed ESR obligations for all financial periods commencing on or after 1 January 2023, marking a significant change in compliance requirements.
2. Elimination of ESR Notifications and Reporting
Businesses are no longer mandated to submit ESR notifications or reports, thereby reducing administrative burdens associated with economic substance compliance.
3. Inclusion of Free Zone Entities
This regulatory change extends to entities operating within UAE free zones, including Meydan Free Zone, ensuring a uniform approach across various business jurisdictions.
4. Simplification of Corporate Governance Requirements
The removal of ESR requirements simplifies corporate governance and operational processes, enabling businesses to allocate resources more efficiently.
5. Alignment with UAE’s Economic Strategy
The decision to rescind ESR obligations reflects the UAE’s commitment to maintaining a competitive and attractive business environment while complying with international standards.
The economic substance regulations in the UAE landscape have undergone a major reset. If you're wondering why ESR in the UAE no longer applies, here's your short answer: the UAE removed ESR requirements for all financial periods starting 1 January 2023. This means that businesses, including those in free zones such as the Meydan Free Zone, no longer need to file ESR notifications or reports for current or future operations. Let's break down what led to this change, what it means for founders, and how compliance works now.
Understanding the Origins of Economic Substance Regulations in the UAE
The economic substance regulations in the UAE were introduced back in 2019. They were created in response to international commitments, particularly the OECD’s BEPS (Base Erosion and Profit Shifting) framework. The main goal? To prevent multinational companies from using the UAE as a base to avoid taxes while having no real presence in the country.
Companies conducting the following "relevant activities" were required to comply:
- Banking
- Insurance
- Investment fund management
- Lease-finance
- Shipping
- Holding company operations
- Intellectual property businesses
- Headquarters and service centres
To stay compliant, businesses had to prove they had qualified staff, office space, and income-generating activities inside the UAE.
What Changed with Cabinet Decision No. 98 of 2024
In 2024, the UAE issued Cabinet Decision No. 98, which officially ended the ESR regime for financial years starting on or after 1 January 2023. Here’s a timeline to help you understand:
This shift aligns with the rollout of the Federal Corporate Tax Law, which includes built-in economic substance requirements.
Key Reliefs Announced:
- No ESR filings required for post-2022 financial periods
- No ESR penalties after 31 December 2022
- Refunds available for penalties already paid
Why ESR Was Removed: A Strategic Shift
The UAE removed ESR filings to simplify its compliance framework. Economic substance rules are now embedded within corporate tax legislation. Businesses no longer have to duplicate compliance efforts across different laws.
Meydan Free Zone helps founders stay focused on their business by reducing such overhead.
What ESR Removal Means for Your Business in Meydan Free Zone
If your business license is issued by Meydan Free Zone, and your financial year starts on or after 1 January 2023:
- You don’t need to file ESR notifications
- You’re exempt from ESR reports
- You avoid AED 20,000–50,000 fines linked to ESR violations
Instead, your focus should be on meeting the economic substance rules under the new corporate tax regime, something Meydan Free Zone already supports as part of your license setup.
Economic Substance vs Corporate Tax: What You Still Need to Do
Though ESR requirements in the UAE are gone, compliance isn’t. Here’s how it works now:
Especially if you are a Qualifying Free Zone Person (QFZP), you’ll still need to prove:
- Core activities are conducted in the UAE
- Staff and office space are in place
- Income is generated from allowed activities
Meydan Free Zone's digital dashboard makes this part seamless, tracking compliance across visa, banking, and tax in one system.
Historical ESR Period: Don’t Skip This
If your business operated between 1 January 2019 and 31 December 2022, you still need to:
- Submit overdue ESR reports (if applicable)
- Retain ESR-related documents for 6 years
The Federal Tax Authority can still review this data.
Who Benefits Most from ESR Elimination?
1. Free Zone Startups
No more double compliance (ESR + Free Zone rules). One simplified path.
2. Multinational Corporations
Less paperwork across borders and more time to focus on growth.
3. SMEs and Tech Founders
Lower admin costs mean more budget for scaling, not surviving.
The UAE’s Commitment to Global Compliance Still Holds
Despite eliminating ESR, the UAE hasn’t stepped back from international standards. The corporate tax law still meets OECD guidelines, and Meydan Free Zone ensures every founder is aligned from day one.
Simplified Compliance, Smarter Setup with Meydan Free Zone
The economic substance regulations in the UAE shift have created a cleaner, more streamlined setup process for founders. By embedding substance rules into corporate tax law, the UAE has removed duplication and reduced compliance costs.
At Meydan Free Zone, your license already meets the new economic substance conditions, no separate ESR forms, no extra paperwork. Just one system that supports your growth.
So, if you’re ready to launch or scale in Dubai, there’s no red tape to hold you back. Get started with Meydan Free Zone and stay ahead of Business compliance in the UAE from day one.
FAQs
1. Do most UAE businesses need to comply with economic substance regulations in the UAE?
No, most UAE businesses are exempt from economic substance regulations in the UAE. ESR only applies to businesses conducting specific "relevant activities" like banking, insurance, fund management, headquarters activities, shipping, holding company activities, intellectual property, and distribution/service centre activities.
2. What are the main ESR in the UAE requirements for applicable businesses?
ESR in the UAE requirements include maintaining adequate employees, incurring adequate expenditure, conducting core income-generating activities in the UAE, having adequate physical presence, and maintaining proper governance and management in the UAE. The specific requirements vary by activity type.
3. How does Business compliance in the UAE differ for ESR-exempt companies?
Business compliance in the UAE for ESR-exempt companies focuses on standard business licensing, VAT compliance (if applicable), corporate tax obligations, and general regulatory requirements. These businesses avoid the additional reporting and substance requirements imposed by ESR.
4. Can a business lose its ESR exemption status?
Yes, if a business changes its activities to include relevant activities covered by economic substance regulations in the UAE, it may become subject to ESR requirements. Regular review of business activities ensures continued compliance with applicable regulations.
5. What should businesses do to ensure proper ESR in the UAE compliance assessment?
Businesses should conduct regular reviews of their activities against ESR in the UAE’s relevant activity definitions, maintain proper documentation of their business operations, and seek professional advice when expanding into new business areas that might trigger ESR obligations.
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