The UAE has introduced key changes to the country’s Economic Substance Regulations (ESR) by releasing the Cabinet of Ministers Decision No. (98) of 2024, which amends the Decision No. (57) of 2020. As per the new Decision, the UAE ESR will no longer be applicable for the financial year started on or after 1 January 2023.

In the wake of the new development, businesses in the UAE are advised to assess the implications of the amendments with the help of ESR consultants. Let us dive in to learn about the latest ESR amendments in the UAE:

ESR Overhaul in the UAE: A Breakdown

Applicability Periods Revised

The ESR reporting requirements in the UAE now apply to financial years from 1 January 2019 to 31 December 2022.

Cancellation of ESR Penalties

All administrative penalties imposed on a Licensee or an Exempt Licensee in accordance with the provision of Cabinet Resolution No. (57) of 2020 referred to, for the financial years ending after 31 December 2022, shall be cancelled. This is a huge relief for businesses in the UAE.

Refunds and Dispute Resolution

If any administrative penalties are imposed on a Licensee or an Exempted Licensee in accordance with the provisions of Cabinet Resolution No. (57) of 2020 referred to, for any financial year ending after 31 December 2022, the Federal Tax Authority shall refund such penalties and terminate all grievances filed in respect thereof.

ESR & Corporate Tax Consideration for Free Zone Businesses

The UAE free zone persons planning to avail of the 0% corporate tax rate benefit as Qualifying Free Zone Persons must comply with certain substance obligations from a Corporate Tax perspective. A key condition to avail of the 0% corporate tax rate is to maintain “adequate substance” in a free zone. The adequate substance condition requires a Free Zone Person to:

• Carry out Core Income Generating Activities in a Free Zone
• Have adequate assets and an adequate number of full-time qualified employees in the Free Zone and incur an adequate amount of operating expenditure

Next steps to Take after ESR Cancellation in the UAE

It is essential for businesses to take the following actions in the wake of the new ESR updates. ESR consultants can provide the UAE entities with a robust action plan. Consider the following actions with respect to the ESR amendments:

ESR compliance from 2023 onwards

Businesses in the UAE are not required to comply with ESR obligations for any financial periods commencing on or after 1 January 2023.

Meet ESR reporting requirements for 2019 – 2022

Companies with ESR reporting obligations for financial years between 2019 and 2022, need to make sure all necessary filings (i.e., ES Notifications and ES Annual reports) are completed for this period.

Assess adequate substance

Free zone entities need to review their operational structure to ensure it aligns with other UAE corporate tax requirements.

Verify eligibility for administrative penalty cancellation.

Assess, with the help of ESR advisers, whether your UAE entity is eligible for the waiver and/or refund of any of the ESR administrative penalties.

Keep track of further clarifications.

Keep track of further updates or clarifications regarding ESR compliance obligations that need to be met for the penalty waivers.

Hire JCA: UAE’s Leading ESR Advisers

Businesses in the UAE need not meet their ESR obligations for the financial year started on or after 1 January 2023. However, the ESR will apply for the financial year starting on or after 1 January 2019 through to 31 December 2022. Businesses in the UAE are advised to assess the implications of the ESR amendments on their operations and take the appropriate actions with the help of ESR consultants such as Jitendra Chartered Accountants (JCA). We are one of the pioneering ESR companies in the UAE with more than two decades of experience in the financial advisory industry. Call us for a consultation on how to keep up with the new ESR amendments.