The UAE introduced Economic Substance Regulations (ESR) in 2019 to align with global standards set by the OECD and EU. These rules ensure that companies conducting certain activities in the UAE maintain genuine economic substance — meaning they have real operations, employees, and decision-making within the country.
In 2025, ESR compliance remains a top priority. Businesses that fail to meet ESR requirements face penalties, license suspension, and reputational risks.
This guide provides the ultimate overview of ESR in the UAE, covering who is affected, reporting requirements, deadlines, penalties, and compliance best practices.
What is ESR in the UAE?
ESR requires UAE businesses engaged in certain “Relevant Activities” to demonstrate that they:
- Have adequate economic substance in the UAE
- Are directed and managed within the UAE
- Generate income from core income-generating activities (CIGAs) performed locall
Relevant Activities Under ESR
Companies must perform an ESR test if they are engaged in one or more of the following activities:
- Banking business
- Insurance business
- Investment fund management
- Lease-finance business
- Headquarters business
- Shipping business
- Holding company business
- Intellectual property (IP) business
- Distribution & service centre business
Even if you do not conduct these activities, an annual ESR Notification is usually required.
ESR Filing Requirements
1. ESR Notification
All UAE businesses must file an annual ESR Notification with their regulatory authority, declaring whether they conduct relevant activities.
- Deadline: Within 6 months of the financial year-end
2. ESR Report
If conducting relevant activities and earning income, the company must also file an ESR Report.
- Deadline: Within 12 months of the financial year-end
- Report includes: business activities, CIGAs performed, employees, office space, and financial details
ESR Test – What You Need to Demonstrate
To pass the ESR test, companies must show:
- Directed and Managed in UAE
- Board meetings held in the UAE
- Minutes signed and retained locally
- Adequate Employees & Operations
- Sufficient qualified staff in the UAE
- Adequate physical office space
- Operating expenses incurred in the UAE
- Core Income-Generating Activities (CIGAs)
- CIGAs relevant to the activity are conducted in the UAE
- Example: For “Distribution & Service Centre Business,” procurement and sales support must happen in the UA
Penalties for Non-Compliance
Failing to comply with ESR in the UAE leads to serious consequences:
- AED 20,000 – failure to file ESR Notification
- AED 50,000 – failure to meet ESR test or file ESR Report
- AED 400,000 – repeated failure in subsequent years
- Possible exchange of information with foreign tax authorities
- Suspension or revocation of trade license
Penalties are enforced by the Ministry of Finance (MoF), and companies are being audited more frequently in 2025.
ESR in Free Zones vs Mainland
- Free Zone Companies: ESR applies equally, especially for Holding Companies, Service Centres, and IP Businesses.
- Mainland Companies: Must comply if engaged in relevant activities.
- Exempt Entities: Certain entities (e.g., UAE government-owned companies) are exempt but must still file ESR Notifications.
ESR and Corporate Tax – How They Interact
With UAE Corporate Tax (CT) effective from 2023, many businesses ask if ESR is still relevant. The answer is yes.
- ESR ensures compliance with international anti-tax avoidance rules
- Corporate Tax ensures domestic taxation of profits
- Companies must comply with both regimes separately
Best Practices for ESR Compliance in 2025
- File ESR Notification early — don’t wait for the deadline
- Maintain ESR documentation (board minutes, employee records, lease agreements)
- Align ESR with Corporate Tax filings for consistency
- Train directors & managers on ESR obligations
- Seek professional advisory — errors in ESR reports are costly
ESR Checklist for UAE Companies
✔ File annual ESR Notification (even if no relevant activities)
✔ Determine if your business conducts relevant activities
✔ Prepare and submit ESR Report if required
✔ Maintain supporting evidence of CIGAs in UAE
✔ Keep records for at least 6 years
Conclusion
The UAE’s Economic Substance Regulations are here to stay, and enforcement is only getting stricter in 2025. Whether your company is in a Free Zone or on the Mainland, you must assess your ESR obligations carefully, file notifications and reports on time, and ensure genuine economic substance in the UAE.
Failure to comply not only brings financial penalties but can also damage your business reputation and lead to international scrutiny
Call to Action
At Advanced AnalytIQ, we help UAE companies stay fully compliant with ESR by:
- Assessing relevant activities and eligibility
- Filing ESR Notifications & Reports
- Advising on ESR tests & substance requirements
- Aligning ESR with Corporate Tax compliance
Contact us today for an ESR health check and ensure your business passes the ESR test in 2025.