How to Structure a Company in the UAE to Comply with Economic Substance Regulations (ESR)

Since 2019, companies operating in the UAE have been required to comply with the Economic Substance Regulations (ESR), initially introduced under Cabinet Resolution No. 31. These regulations were designed to ensure that businesses registered in the UAE have genuine economic activities in the country, rather than existing solely to gain tax advantages. In 2020, the framework was updated through Cabinet Resolution No. 57, aligning more closely with the recommendations of the OECD and the European Union. For any business setup in Dubai , understanding ESR is a fundamental step toward legal compliance and long-term success.

Purpose of the Economic Substance Regulations

The core purpose of the ESR is to confirm that companies have a real economic presence in the UAE. This applies to both mainland and free zone entities. The regulations are specifically targeted at businesses engaged in one or more of the following relevant activities:

• Banking
• Insurance
• Investment fund management
• Lease-finance
• Intellectual property (IP)
• Holding companies
• Shipping
• Distribution and service centers
• Headquarter businesses

ESR Notification and Reporting Requirements

All companies engaged in relevant activities must submit an ESR notification each year. This preliminary filing informs authorities about the company’s operations. If the company earns income from relevant activities, it must also submit a more detailed ESR Report. This report includes:

• Financial information
• Ownership structure
• Management and employee qualifications
• Details of the company’s physical presence in the UAE

The Economic Substance Test

To comply with the ESR, companies must meet three key criteria:

Management and Control in the UAE

The company’s strategic decisions must be made in the UAE. This typically involves holding board meetings in the country and having resident directors or management personnel.

Adequate Operating Expenditure and Qualified Staff

The company must have sufficient operating costs and employ qualified personnel based in the UAE.

Physical Presence or Outsourcing within the UAE

The company must either own or lease physical assets (such as office space and equipment) or outsource relevant functions. Outsourcing is acceptable only if the service providers are located in the UAE and are under the company’s oversight. Companies that opt for outsourcing may benefit from professional accounting and bookkeeping services in Dubai to support operational transparency.

Special Requirements for IP Companies

Companies that generate income from intellectual property licensing are considered high-risk IP licensees. They are subject to stricter compliance measures. These companies must demonstrate active management of IP rights within the UAE, not just registration of those rights.

Simplified Rules for Holding Companies

Holding companies whose income is solely from dividends and capital gains are subject to a simplified ESR test. However, if the holding company is engaged in additional activities such as owning real estate, operating assets, or earning other types of income, then it must meet the full requirements like any other business performing relevant activities. If the holding company is located in Sharjah, it must also follow the rules set by the Sharjah free zone company formation authority if registered there.

Filing Deadlines and Penalties

The Economic Substance Regulations (ESR) require businesses in the UAE to be aware of two crucial dates. First, you must file the ESR Notification within six months after the end of your fiscal year. The entire ESR Report is due twelve months after your fiscal year ends.

Missing these deadlines can be expensive. Fines for a first violation are between AED 10,000 and AED 50,000. If the problem persists, fines can go up to AED 300,000. In rare situations, authorities may refuse to renew your company license or terminate it entirely.

If you intend to register a corporation in Dubai mainland, you must be aware of these criteria from the start to avoid future legal or financial problems.

Document Requirements and Audits

Regulatory authorities may request various supporting documents, including:

• Meeting minutes
• Financial statements
• Employment contracts
• Timesheets
• Proof of physical office space

Authorities may also conduct on-site inspections.

Guidelines on Outsourcing

Outsourcing is permitted under ESR, but the company remains responsible for compliance. Contracts with service providers must:

• Allow regulators full access to all relevant documentation
• Prevent duplication of substance (e.g., a contractor’s work cannot be counted toward multiple companies)

For companies working with external specialists, services such as pro services in Dubai are useful in ensuring regulatory documentation is correctly prepared and submitted.

Regulatory Oversight

Compliance is monitored by the appropriate regulatory authority based on the company’s registration location:

• DED (Department of Economic Development) for mainland companies
• Free zone authorities for businesses in free zones
• UAE Central Bank for financial institutions

Each entity in a group must report individually, even if it operates under a consolidated structure. For example, companies operating under a business setup in UAE free zone are subject to oversight by their specific free zone regulators.

Record-Keeping Requirements

Companies must retain all ESR-related documentation for a minimum of six years after the end of the relevant financial period. This includes:

• Evidence of management activities
• Financial and operational records
• Employment details (for both staff and outsourced contractors)
• Ultimate beneficial ownership (UBO) and tax residency details

Importance of Compliance

Since 2020, meeting ESR requirements isn’t optional, it’s a legal must. That includes submitting both the notification and the full report on time. Say your company’s financial year wraps up on December 31. In that case, you’ve got until the same date the following year to get your ESR Report in. On paper, it appears simple, but failing to meet the deadline or providing incorrect information will cost you up to AED 50,000.

This is especially important for businesses, such as an offshore company in Dubai. Even with their unusual design, they must demonstrate genuine economic activity, not simply a name on paper. It’s a bit more complex, and the stakes are enormous, so getting it right from the outset is critical.

Final Thoughts

The ESR framework in the UAE is not merely a formality. It is a robust compliance system designed to ensure real economic presence in the country. Companies must maintain physical offices, employ qualified staff, incur local expenses, and demonstrate effective management. Failure to meet ESR requirements can not only result in financial penalties, but also in automatic information exchange with foreign tax authorities.

Businesses that engage in related activities should conduct a yearly internal ESR assessment and alter their corporate structure or operating model as needed to be compliant and maintain their business licenses. Proper ESR alignment should be included in the early business strategy to ensure long-term regulatory compliance, particularly for those wanting to setup a company in Dubai .