Economic Substance Regulations in UAE

With economic substance regulation services, we assess your ESR position and provide assistance with tax filings. This streamlines your business and helps with taxation.

The economic substance framework applies to all companies licensed in the UAE to control tax evasion. It was founded to regulate tax liabilities in the UAE.

This helps to streamline the advantages taken due from the low-tax systems. The regulation will apply to businesses registered onshore and offshore.

This makes it easier for businesses in the nation to pay the right amount of taxes. The UAE is a member of the OECD Inclusive structure. The Economic Substance Regulations in UAE are implemented as part of its commitment and in response to an evaluation of the country’s tax structure by the European Union Code of Conduct Group on Business Taxation.

What are Economic Substance Regulations (ESR) in UAE?

The ESR was created to stop businesses, particularly multinational organizations, from artificially moving earnings to nations with low or no business income taxes in order to pay less tax in their home jurisdictions (countries). Setting up front companies in countries with low or no taxes and moving the operations there is one strategy used for this.

These businesses will not use any real resources in their operations; instead, their main goal is to lessen the tax burden on multinational firms. Since fewer taxes are now legally needed to be paid to the respective countries, they are unable to meet their budgetary obligations.

Following is a timeline for ESR deployment in the UAE:



April 2019

Resolution 31 (2019) of the Cabinet of Ministers relating to economic substance (“Resolution 31”)

September 2019

Cabinet Decision No. 31 of 2019 About the Requirements, the Ministerial Decision No. (215) of 2019 on Issuance of Directives for Implementation (“Resolution 215”)

August 2020

Resolution 57 (“Resolution 57”), adopted by the Cabinet of Ministers in 2020 and repealing and replacing Resolution 31

August 2020

Resolution 215 (“Resolution 215”), which repeals and replaces Ministerial Decision No. (100) of 2020 on the Issuance of Directives for Implementing the Provisions of Cabinet Decision No. 57 of 2020 Concerning ESR

In conclusion, Resolutions 57 and 100 are the current and operative ESR regulations in the United Arab Emirates. UAE is one of the 38 nations that make up the OECD, an intergovernmental organization.

The organization establishes detrimental tax practice prevention principles, which are followed by all of its members, with the goal of promoting global trade and economic progress. ESR is one such preventive practice, and by putting the ESR laws into effect, the UAE has reinforced its commitment to the international community.

The corporation and its transactions must represent an economic reality and serve a significant purpose other than to lessen the tax burden in order to be in compliance with ESR.

This principle is used by the Federal Tax Authority in the United Arab Emirates to determine whether or not UAE-based businesses engage in tax avoidance strategies or other practices that are considered to be “abusive.”

What is an Ultimate Beneficial Ownership (UBO)?

Ultimate Beneficial Ownership (UBO) is the term used to describe the natural person who ultimately owns or controls a business whose behalf a transaction is carried out.

To Whom Is ESR Applicable?

All licensees in the UAE, including those on the mainland, in free zones, and offshore, as well as natural people, etc., who engage in activities that the ESR Regulations deem to be “Relevant Activities” (RA) are subject to ESR. The following are the RAs listed in the regulations:

  • Banking Business
  • Investment Fund Management Business
  • Insurance Business
  • Shipping Business
  • Distribution & Service Centre Business
  • Lease-Finance Business
  • Headquarters Business
  • Holding Company Business
  • Intellectual Property Business.

It should be emphasized that the ESR’s applicability has no upper limit. Licensees operating one or more of the aforementioned activities in the UAE must show that they have a sufficient level of economic clout there, proportionate to the nature of the RA (relevant activity) and the quantity of relevant income it generates.

What Is Economic Substance Test (ESR Test)?

Licensees to whom ESR is applicable, as stated above, must satisfy the Economic Substance Test, which entails fulfilling the following three requirements:

The Licensee carries out Core Income-Generating Activities (“CIGA”) in the United Arab Emirates;

The Relevant Activity is controlled and directed in the United Arab Emirates, and

c. Considering the amount of Relevant Income generated by a Relevant Activity,

(i) employs a sufficient number of capable full-time (or equivalent) workers who are physically present in the UAE in relation to the activity (whether or not they are hired by the Licensee or by another entity and whether on a temporary or long-term contract),

(ii) has enough operational expenses in the UAE, and

(iii) possesses sufficient real estate (such as buildings) in the UAE.

To demonstrate conformity with the ESR Law, licensees to whom ESR is relevant are required to meet all the requirements of the aforementioned test.

What Are the Deadlines under ESR?

For financial years beginning on or after January 1, 2019, ESR in the UAE was applicable. You need to satisfy the following submission deadlines if your company is covered by ESR:

Within six months from the end of your financial year

Submit ESR Notification acknowledging which RA was carried out and if revenue was generated from the RA

Within 12 months from the end of your

financial year

Submit ESR Report detailing the

financial information pertaining to the

RA conducted


Is ESR Submission a One-Time Process Only?

According to the ESR regulations, each Licensee is required to evaluate each activity performed during the financial year to see if it fits under the purview of ESR.

When deciding whether they participate in a RA and are therefore subject to the ESR Regulations, businesses operating in the UAE are expected to prioritize substance above form, the UAE licensee should examine actions conducted over the course of a financial year in addition to the data on their commercial license in order to reach this determination.

What Are the Consequences of Non-Compliance?

UAE has put in place a strong framework, was failing to disclose or the inability to demonstrate that an in-scope entity has substance in the UAE may result in repercussions, such as monetary fines and license revocation. The following monetary fines and sanctions will be imposed on licensees for non-compliance:

Nature of Violation


Failure to submit ESR Notification

AED 20,000/-

Failure to submit an ESR Report

a. AED 50,000/-; and

b. Deemed failure to demonstrate economic

substance in the UAE

Failure to provide accurately or

complete information

a. AED 50,000/-; and

b. Deemed failure to demonstrate economic

substance in the UAE

Failure to demonstrate sufficiently

economic substance in the UAE

(First failure)

a. AED 50,000/-; and

b. Information exchange with the foreign competent authority of Parent/Ultimate Parent/UBO

Failure to demonstrate sufficient

economic substance in the UAE

(Second consecutive failure)

a. AED 400,000/-; and

b. Information exchange with the foreign competent authority of Parent/Ultimate Parent/UBO

c. The license could be; suspended, withdrawn, or not renewed

The impact of the ESR must be understood by licensees in the UAE in order to prevent any penalties or sanctions that might be imposed and which might interfere with regular business operations.

Avail of best quality Auditing and Accounting services from JAXA

The expert will help to tackle business issues by following proper Accounting and Auditing guidelines and will also assist you in scaling up your business. JAXA also provides various other services such as Taxation Services in DubaiPayroll Services in Dubai, Cash flow forecasting, and many more.

Avail best quality Auditing and Accounting services from JAXA

The expert will help to tackle business issues by following proper Accounting and Auditing guidelines will also assist you to scale up your business. JAXA also provides various other services such as Tax Services, Payroll Services, Cash flow forecasting and many more.

Advantages of Economic Substance Regulations in UAE

Enhances the Goodwill of the Company

Complying to the Economic Substance Regulation will allow the investors to sense of relief that the company can be trusted. This will attract more potential investors for the company.

Prevent Tax-Related Fraud in the Country

ESR will provide a correct picture of the taxes required to pay the company and will also create transparency for the government.

Enhance Fair Competition

Every company will have to comply with the Economic Substance Regulations, which will lead to a reduction in bogus and fraudulent companies.

Support the Economy of the Country

The implementation of this regulation will increase the revenue from the taxes paid by the companies, which will, in turn, affect the economy in a positive way.

What we provide

We ensure that all the records are compliant to the International Financial Reporting Standards (IFRS)
We are registered and approved auditors in major free zones in Dubai making it easy to conduct audit in the free zone.
We have an experienced team of over 75+ employees and have an experience of 15+ years.
Over a decade of quality service has made us one of the most preferred auditing and accounting firms in Dubai.


Client Approaches Jaxa

Company data is provided

Jaxa Understands the Business

The work done by the business is analyzed

File the Notification

Jaxa will help in filing the positive or negative notification concerned with the relevant activities

ESR Test

The companies which conduct the relevant activities need to conduct as ESR test


What is the purpose of ESR?

The ESR’s primary purpose is to ensure that the UAE business entities do not artificially inflate their profits.

Who is excluded from the Economic Substance Regulation?

According to the revised ESR resolution, the following entities which undertake Relevant Activity in the UAE –
1. An Investment Fund (It will include its underlying SPVs and/or Investment Holding entities)
2. An Entity that is tax resident outside the UAE
3. Branch of a foreign entity whose relevant income is subject to tax outside the UAE
4. An Entity that is wholly owned by UAE residents and meets the following conditions:
● The Entity is not part of an MNE Group
● All the activities of the Entity are exclusively carried out in the UAE

What if the business entity conducts the “Relevant Activity,” but no income is earned?

In such a case, the business entity must submit the relevant notification to the Regulatory Authority. Still, there is no requirement to file an economic Substance Return for the financial period.

Do the business entities going through liquidation need to file ESR notification?

Yes, they need to

What is Ultimate Beneficiary Ownership?

UBO is the ultimate owner of the company.