ESR May Be Repealed - But Audits Are Just Beginning

While Cabinet Decision No. 98 of 2024 has formally repealed the UAE Economic Substance Regulations (ESR) for financial years commencing on or after 1 January 2023, enforcement activity is far from over. The Federal Tax Authority (FTA) has significantly intensified its audit focus on historical ESR filings from 2020 through 2023.

For many businesses, the real risk lies not in future obligations but in how defensible and accurate past ESR submissions were.

Why ESR Still Matters in 2025

• ESR audits are ongoing Numerous businesses across sectors are receiving audit notices, with detailed FTA queries on activity classification, core income-generating activities (CIGAs), board decisions, and staffing structures.
• Historical filings are under scrutiny Despite the repeal, the FTA continues to audit prior periods, and non-compliance may attract penalties of up to AED 400,000 per entity, per year.
• Recordkeeping obligations persist Entities remain required to retain supporting documentation for five years from the date of filing—even for repealed periods.
• Submissions were often generic or misaligned Many ESR filings lacked tailored analysis of the entity’s operations, which now presents challenges during FTA review.

Common Audit Challenges

• Insufficient documentary evidence for CIGAs performed in the UAE
• Inaccurate self-assessment or misclassification of relevant activities
• Missing or inconsistent board minutes, resolutions, or director records
• Inability to substantiate employee presence or expenditure thresholds
• Incomplete outsourcing declarations or lack of contractual proof

Recommended Next Steps for Businesses

• Evaluate whether past ESR positions are audit-ready
• Identify years with high exposure due to standardised or incomplete filings
• Consolidate supporting documentation in a defensible format
• Prepare internal stakeholders to address audit inquiries
• Reconcile ESR positions with Corporate Tax and VAT filings, where applicable