Is ESR Still Required in the UAE? The 2026 Answer

• 11 July, 2026
• By Safwan, Managing Partner
• Compliance

The year the UAE switched Economic Substance Regulations off

For financial years starting on or after 1 January 2023, UAE businesses no longer file ESR notifications or reports. Under Cabinet Decision No. 98 of 2024, Economic Substance Regulations were discontinued for those later periods, and penalties issued or paid for them are being cancelled and refunded. ESR still governs the 2019–2022 “ESR Period,” and free-zone companies must still hold real substance to keep their 0% corporate-tax rate — but that is now a corporate-tax rule, not ESR.

If you spent 2020–2022 filing ESR notifications and reports, the natural 2026 question is simple: do I still have to? For most Dubai businesses the answer is now no — and that surprising answer is exactly why so much of the advice still online is out of date. Here is the current position, in plain English.

The short answer: ESR is discontinued from FY 2023

What Cabinet Decision 98 of 2024 actually did

The original regime (Cabinet Decision No. 57 of 2020) required “relevant activities” — holding companies, IP, finance and leasing, shipping, distribution and more — to file an annual notification and, where income arose, an economic-substance report. Cabinet Decision No. 98 of 2024 drew a line: the reporting framework simply does not apply to financial years beginning on or after 1 January 2023, and the FTA is unwinding penalties raised for those periods.

A worked example: which years are in, which are out

Take a Dubai mainland holding company whose financial year follows the calendar year. For FY 2019 to FY 2022 it filed ESR notifications each year and, where it earned relevant income, economic-substance reports — those filings remain valid and the company should keep the supporting records. For FY 2023, FY 2024 and FY 2025 it files nothing. If the FTA raised a late-filing penalty against it for the FY 2023 notification it never submitted, that penalty is cancelled under Cabinet Decision No. 98 of 2024 — and if the company already paid it, the amount is refunded. A penalty for its FY 2021 filing, by contrast, still stands and must be resolved or appealed in the normal way.

One note of caution: the discontinuation is framed around financial years starting on or after 1 January 2023, with penalty cancellation tied to periods ending after 31 December 2022. For a company with a calendar-year financial year the two tests point the same way. If your year-end is different — say 31 March — a straddling period deserves a careful look before you assume it is out of scope. A Dubai corporate-tax consultant can confirm the position for a non-calendar year in minutes.

Substance did not disappear — it moved into Corporate Tax

Discontinuing ESR does not mean “substance” stopped mattering. A Qualifying Free Zone Person that wants the 0% corporate-tax rate must still maintain adequate substance in the free zone — adequate assets, qualified employees and operating expenditure for its core income-generating activities. That test now lives inside Federal Decree-Law No. 47 of 2022 and the free-zone corporate-tax decisions, not ESR. Same idea, different law.

Mainland vs free zone: who should still care

For a mainland Dubai company, the discontinuation is almost pure good news: no more ESR filings, no relevant-activity analysis, and any post-2022 penalties unwound. The only live task is closing out the 2019–2022 legacy period cleanly. For a free-zone company the stakes are higher, because substance now protects real money. Consider a free-zone distribution company earning AED 12 million of qualifying income at the 0% rate. If it cannot evidence adequate substance and loses its Qualifying Free Zone Person status, that income falls into the standard regime — 9% above the AED 375,000 threshold, roughly AED 1,046,250 of corporate tax a year. In other words, the substance test did not get softer when ESR ended; it simply attached itself to a much larger number. Our QFZP qualifying-income guide covers what that test demands in practice.

How to claim an ESR penalty refund

The refund is the part most businesses get wrong — usually by assuming it happens automatically and never checking. The mechanics are straightforward if you work through them methodically:

1. List every ESR penalty your business was ever issued, with the financial year each one relates to.
2. Split them by period: penalties for financial years ending after 31 December 2022 are cancelled; 2019–2022 penalties are not.
3. Gather proof of payment for any eligible penalty you actually paid — receipts, bank records and the original penalty notice.
4. Confirm the cancellation with the FTA and follow its process through to the refund landing in your account.
5. Document the closure so your compliance file shows the penalty, the cancellation and the refund end to end.

Common mistakes we still see

Because the discontinuation reversed four years of ingrained habit, the errors in 2026 tend to run in both directions — some businesses keep doing work that is no longer required, while others stop doing work that still is. These are the five we correct most often in Dubai compliance reviews:

What Dubai businesses should do now

1. Stop preparing FY 2023+ ESR filings: redirect that effort to corporate-tax compliance.
2. Close out 2019–2022: make sure old notifications, reports and any penalties are resolved or under appeal.
3. Claim refunds: if you paid an ESR penalty for a post-2022 period, follow up on the cancellation and refund.
4. Protect your free-zone 0%: if you are a QFZP, evidence your adequate substance under the corporate-tax rules.
5. Update your compliance calendar: remove ESR deadlines and confirm your corporate-tax and UBO dates instead.

Two of those steps deserve professional eyes. Closing out the legacy period matters because ESR penalties for 2019–2022 are not cancelled — if one is still open, it needs to be paid, settled or appealed like any other assessment, and our guide to UAE tax penalties and voluntary disclosure explains how disputes and reconsiderations run. And the free-zone substance review is worth doing annually, not once: staff numbers, outsourcing arrangements and expenditure drift over time, and the 0% rate depends on the position each tax period, not the position when you set up. See our free-zone corporate tax service for how we run that review.

The legal basis

The original Economic Substance Regulations were issued under Cabinet Decision No. 57 of 2020, which required licensees carrying on relevant activities to notify and report annually. Cabinet Decision No. 98 of 2024, in force from September 2024, discontinued that regime for financial years starting on or after 1 January 2023 and provided for the cancellation and refund of administrative penalties imposed for periods ending after 31 December 2022. The free-zone substance requirement that survives — the “adequate substance” condition for a Qualifying Free Zone Person’s 0% rate — sits in Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses and its free-zone Cabinet and Ministerial Decisions. If any of those instruments touches your structure, the safest move is a one-off review that closes ESR for good and stress-tests your corporate-tax substance in the same sitting.

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