What Cabinet Decision 98 of 2024 changed
In September 2024 the UAE narrowed the Economic Substance Regulations to a closed historical window. Cabinet Decision No. 98 of 2024 provides that the rules cease to apply to any financial year ending after 31 December 2022. It was published in the Official Gazette on 16 September 2024. A company with a financial year running to 31 December 2023 or later no longer files an Economic Substance notification or report. This is the change that corporate lawyers in Dubai now explain most often, because many finance teams still budget for a filing that the law has removed.
The regulations did not disappear. They now apply only to the historical period, from 1 January 2019 to 31 December 2022. For that window, the obligations stand as they always did. The Ministry of Finance tied the change to the arrival of federal corporate tax. That tax carries its own substance test for free zone companies. It made the separate Economic Substance return redundant for later years.
The position splits by financial year. A year ending on or before 31 December 2022 sits inside the Economic Substance regime. A year ending after that date sits outside it. Everything below follows from that single line.
Which financial years still carry an ESR obligation
The historical period still matters, and this is where the cancellation is misread. Any company that was a Licensee between 1 January 2019 and 31 December 2022 still owes full compliance for those years. That covers any notification or report it never filed, and the economic substance test for each year in which it earned income from a Relevant Activity.
The nine Relevant Activities were banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding company, intellectual property, and distribution and service centre. A company that ran any of these during the historical period cannot treat the 2024 change as a clean slate. Where a 2020 or 2021 filing was missed, the Federal Tax Authority can still pursue it. A group that used a UAE holding company in those years should check its record for each of them, because holding companies sat squarely inside the regime.
The task here is a review, not a filing. A company should confirm, year by year across the historical period, whether it was a Licensee, whether it filed, and whether it met the substance test. Where a gap appears, the old rules govern it. The 2024 decision did not wipe it.
What happened to ESR penalties
The penalty position moved with the filing position. Cabinet Decision No. 98 of 2024 cancelled the administrative penalties issued for financial years ending after 31 December 2022. The Federal Tax Authority refunds any amount already collected for those years, so a company fined for a 2023 non-filing can recover that money.
Historical penalties are a different matter. Fines tied to the 2019 to 2022 period remain in force, and any dispute over them continues under the Economic Substance rules. Those penalties were not small. A missed notification drew a fine of AED 20,000, and a missed report or a failed substance test drew AED 50,000, with higher figures for repeated breaches. A company that carries an unresolved penalty from the historical period still has to deal with it. The ADGM guidance for ADGM registered entities confirms the same split for companies inside that free zone.
How corporate tax absorbed the substance test
Economic substance did not leave the UAE. It moved into the corporate tax system. A free zone company that wants the 0 per cent rate as a Qualifying Free Zone Person must still show adequate substance in the UAE. It must also state that position in its corporate tax return through the Federal Tax Authority's EmaraTax portal. The test the Economic Substance regime once ran on its own now runs inside the tax return.
The two regimes cover similar ground through different forms. The table below sets out where they differ.
For a free zone group, the substance question is now answered once a year, inside the corporate tax filing, rather than in a standalone Economic Substance report. The participation exemption and the qualifying income rules sit alongside it. The substance a company keeps in the UAE feeds directly into whether its income is taxed at 0 or 9 per cent.
What should UAE companies do about economic substance in 2026?
The Economic Substance Regulations no longer require a notification or report for any financial year ending after 31 December 2022. The penalties for those later years have been cancelled. For the current year, there is nothing to file under the Economic Substance regime. It is worth building that into the wider UAE compliance calendar, so the removed filing is not chased by mistake.
The work that remains points backwards and sideways. Backwards, to the historical period from 2019 to 2022, where unfiled returns and unresolved penalties still carry exposure the 2024 change did not touch. Sideways, to corporate tax, where the substance test now lives for any free zone company seeking the 0 per cent rate. A company that reads the cancellation as the end of substance in the UAE gets it wrong on both counts.
Some groups need to review their historical Economic Substance position. Others are planning their free zone substance under corporate tax. Our corporate lawyers in Dubai advise on the closed regime and on the rules that replaced it.
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