The UAE has executed the ESR (Economic Substance Regulations) to align with international criteria and contest harmful tax practices. These rules are intended to confirm that entities working in the UAE conduct extensive economic activities within the country, rather than involved in offshore tax evasion.

Obedience to the ESR is essential for companies to keep their status and avoid weighty penalties. In this article, we will see the penalties related to non-compliance with ESR in the UAE. We will see several consequences. Understanding these consequences is necessary for businesses to direct the regulatory landscape successfully and alleviate any potential risks. 

What are the activities under the scope of ESR?

 The ESR mainly relates to any entity (Free Zones or Continental) within the UAE that take on Relevant Activities. Some major Relevant Activities are;

  • Banking
  • Insurance
  • Shipping
  • Headquarters
  • Lease-finance
  • Holding companies
  • Intellectual property
  • Distribution and service centers
  • Investment fund management

These are 9 relevant activities listed under the Economic Substance Regulations. A unit carrying out Relevant Activities must obey the Economic Substance requirements. Though, units that are direct or indirect kept by the UAE government are separate from the scope of ES. 

What are the requirements of ESR Obedience?

A licensee is mandatory to submit an ESR notification. It should be in the form and way identified by the Regulatory Authority. It should be done before the deadline, which is 6 months from the end of the respective financial year.

The Regulatory Authorities have stated the deadline for their jurisdiction. A licensee is also obligated to submit an Annual Report. It should be submitted within 12 months from the end of the particular financial year. 

All units working in the UAE should evaluate their activities in the light of new ES Regulations. They must ensure obedience to the Regulations and the reporting requirements on an apt basis. 

What are the penalties for ESR in UAE?

Non-obedience with the ESR in the UAE can lead to weighty penalties. These consequences and penalties are intended to impose adherence to the regulations. It also ensures that units engaging in relevant activities keep a significant economic presence within the UAE. Here are some major penalties related to non-obedience; 

1.      Deferral, Cancelation, or Non-Renewal of Trade License

Units found to be constantly non-obedient with the ESR may face the deferral, cancelation, or non-renewal of their trade license. This can strictly influence the unit’s ability to conduct business operations in the UAE. 

2.      Executive Fines

Failure to comply with the economic substance requirements can outcome in executive fines executed by the regulatory authorities. The amount of penalty differs depending on the severity and period of non-compliance. Usually, fines can range from AED 10,000 to AED 50,000 or more. It depends on the explicit situation. 

3.      Exchange of Information

Non-obedient units may be subject to improved inspection and information sharing with foreign tax authorities. This can direct to further inquiries and possible penalties enforced by foreign jurisdictions. 

4.      Rejection of Tax Deductions and Loss Carryforwards

Failure to comply with the ESR may result in the rejection of tax deductions, exemptions, and loss carryforwards for non-obedient actions. This can direct to upper tax liabilities and financial inferences for the unit. 

5.      Status Damage

Non-obedience with ESR can lead to status damage. As it may specify an absence of transparency or obedience to international standards. Status damage can disturb business relationships, partnerships, and the unit’s overall upended in the market. 

6.      Regulatory Actions and Authorizations

Regulatory authorities in the UAE have the authority to take numerous actions and execute further authorizations on non-obedient units. These activities may contain;

  • Increased Reporting Obligations
  • Mandatory Corrective Measures
  • Additional Penalties

7.      Influence on Associated Parties

Non-obedience with ESR can have consequences not only for the non-obedient unit but also for its associated parties such as;

  • Shareholders
  • Beneficial Owners

Associated parties may face forfeits or other opposing penalties due to their association with a non-obedient unit. 

How to ensure Obedience with the ESR in UAE?

Here are some main points on how to ensure obedience to the ESR in the UAE;

·       Comprehend Applicability

Govern whether your unit falls within the range of the ESR. Evaluate if they meet the standards well-defined by the regulations. 

·       Conduct Internal Valuations

Assess your unit’s activities to certify they meet the substance requirements stated by the ESR. 

·       Keep Correct Records

Keep comprehensive records that validate the substance of your unit’s activities in the UAE. This contains financial records and other applicable certifications. 

·       Obey Reporting Requirements

Submit the obligatory reports to the regulatory authorities within the stated deadlines. Ensure that the reports are correct and complete. 

·       Employ Professional Assistance

Pursue direction from legal and tax specialists such as Farahat and Co.. with expertise in ESR compliance. They can offer valuable guidance on understanding the regulations. 


It is essential for businesses working in the UAE to have a strong understanding of the penalties associated with the ESR to continue compliance. Businesses can get help from trustworthy firms like Economic Substance Regulations can offer valuable direction and expertise in directing the intricacies of ESR obedience. By getting guidance from experienced professionals, businesses can alleviate the risks of weighty penalties.