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Economic Substance Regulation as per new amendments

Table of Contents

The UAE introduced ESR to ensure businesses have real operations. Recent changes made rules stricter. This guide explains ESR clearly. companies are often required to submit reports regularly to show compliance and commitment to things like workplace safety, emissions reduction, non-discrimination, and other governance matters. If your company failed to file an ESR report on time and got slapped with fines or penalties as a result

What are ESR?

ESR aim to stop “shell companies” – companies without real work or presence using the UAE for tax benefits only. ESR checks if companies do main income activities in UAE and follow rules like employing people and spending money.

How did ESR change?

In 2023, new rules expanded who must follow ESR. More kinds of companies like branches must now follow. Extra approved activities like distribution and service centers were added. Stricter rules for approved spending and new reporting duties were made.

Which companies are affected most?

The changes impact all doing approved activities in industries like banking, insurance, investment management, renting, headquarters, shipping, owning companies, and more. More real presence is now needed through offices, staff, and real operations to remain okay.

How to know approved activities?

Companies must check their work and the UAE approved activities list for their industry. Common approved activities for financial firms include banking, insurance, investment management. For trade companies, approved activities could be buying and selling goods. Knowing approved activities is important to meet substance rules.

What are substance requirements?

To pass the economic substance test, companies must do core income making activities in UAE, be managed strategically from UAE, spend adequately here and employ adequately trained, skilled staff in UAE.

How much approved spending is needed?

The minimum approved expenditure limit changes based on company size and activity. For small companies under AED 3 million total income, AED 100,000 is required. Medium firms between AED 3-20 million need AED 250,000. Large firms above AED 20 million total income must spend AED 1 million within UAE.

What documents must be filed?

Businesses must file an annual compliance notification form along with details of approved activities, employment details and financial records proving expenditures. Late penalties apply for not filing or not obeying rules. Record keeping of upto 6 years is also needed. Outsourcing compliance ensures correct filling.

How can ESR compliance be done?

Companies can do a self-check finding activities, expenditures and employees. Developing internal ESR policies and paperwork procedures helps follow ongoing compliance. Outsourcing to specialized ESR consultants provides reassurance while allowing focus on core jobs. Compliance programs must change to new guidelines.

Qualifying Activities

As mentioned, companies must identify qualifying economic activities from the prescribed list 

for their industry. For example, trading companies can consider the following:

  • Purchase and sale of goods – For a distributor, importing and supplying goods would qualify.
  • Transportation of goods – Logistics firms involved in transportation, storage fulfill this criterion.
  • Management of companies – Providing strategic direction, operational or financial management to group entities can be a valid activity.

Certain activities like purely administrative or supporting functions may not meet the substance test on their own. It’s important to substantiate core revenue-generating operations within the UAE.

Satisfying the Employment Criterion

Adequate personnel with appropriate qualifications, experience and skills must be employed in the UAE to directly support qualified activities. This typically means:

  • Full-time UAE residents continuously employed for the year.
  • Roles directly tied to generating company income like sales, operations, finance etc.
  • Staff holding board/senior management roles contributing to strategic decisions.

For most cases, employing at least one suitably qualified person would meet the employment standard based on company size. Outsourcing payroll and related compliance services aids this domain.

Additional Compliance Options

In certain situations, companies can leverage the following options to boost their compliance standing:

  • Renting adequately sized UAE business premises instead of aShared/virtual office.
  • Outsourcing accountancy/tax filing activities to UAE-based licensed professionals.
  • Maintaining and presenting relevant local and international records of Board meetings, AGMs and other governance paperwork.
  • Expanding the scale and scope of UAE operations over time in line with business growth Plans.
  • Engaging reputed UAE-based consultants certified for ESR advisory can strengthen applications.


Checking ESR rules may seem complex at first but following step-by-step makes regulations easier to understand. Outsourcing to experts like Horizon ensures easy compliance so businesses succeed in UAE freely. Correct guidance is important to use UAE’s business advantages well.


Are all UAE companies subject to ESR?

No, only relevant entities doing specified activities as per industry need comply.

What if a company is not obeying rules?

Not obeying can attract penalties up to AED 10,000 per missing document or disclosure. Repeat not filing may also affect business license renewal.

How is ESR compliance assessed?

Authorities evaluate substance through annual filings, onsite verifications and benchmark companies against local industry standards.

What if a penalty is levied?

Businesses can clarify submissions, rectify non-compliances to minimize penalties. Repeated non-compliance may impact future license renewals.

Can locally incorporated companies also be impacted?

Yes, all operating entities including UAE-formed companies must demonstrate substance based on economic activities conducted. Substance rules apply irrespective of legal ownership structure.




Ms. Vibha Modi, CA, is supported by 13+ Years of Corporate Tax, International Taxation and Accounting Expertise.

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