Which UAE Companies Are Subject to ESR Requirements?

One of the most common questions business owners in the UAE ask is whether their company is subject to Economic Substance Regulations (ESR). The answer depends on the type of entity, the activities it carries out, and the income it earns. This guide provides a clear breakdown of which companies must comply and which ones may be exempt.

The General Rule

Any entity that holds a licence issued by a UAE licensing authority and carries out one or more Relevant Activities is subject to ESR. This applies to:

• Mainland companies: Licensed by the Department of Economic Development (DED) in any emirate.
• Free zone companies: Licensed by any of the UAE’s 40+ free zone authorities.
• Branches of foreign companies: Registered and licensed in the UAE.

The key factor is not the type of licence or the legal form of the entity, but whether the entity carries out a Relevant Activity and earns income from it.

The Nine Relevant Activities

ESR applies only to entities that carry out one or more of these activities:

Important Clarifications

Licence vs. Actual Activity

Having a licence that permits a Relevant Activity does not automatically mean you are subject to ESR. The regulation applies when you actually carry out the activity and earn income from it. However, if your licence covers a Relevant Activity, you must still file the annual ESR notification — even if you did not earn income from that activity during the period.

Distribution and Service Centre — Related Parties Only

The distribution and service centre activity under ESR applies specifically to entities that distribute goods purchased from related parties or provide services to related parties. If your trading company buys from unrelated third-party suppliers and sells to unrelated customers, this activity typically does not apply to you.

Holding Company Activity

A company is carrying out a “Holding Company” Relevant Activity if its primary purpose is to hold equity participations in other entities and it earns income from those participations (such as dividends). Companies that hold investments as a secondary activity may not be subject to the holding company ESR requirements, depending on the circumstances.

Entities That Are Exempt from ESR

The following entities are exempt from the economic substance requirements (but may still need to file a notification):

• Investment funds: Entities that are investment funds or qualify as investment fund vehicles are exempt from the ESR substance test (though fund management companies are not).
• Entities tax resident outside the UAE: If an entity can demonstrate that it is tax resident in a jurisdiction outside the UAE (and provides evidence such as a tax residency certificate), it is exempt from the ESR substance test. It must still file the ESR notification and provide proof of its foreign tax residency.
• Entities wholly owned by UAE residents: Entities that are directly or indirectly wholly owned by UAE nationals or the UAE government, and that operate solely within the UAE, may be exempt.

What About Professional Service Companies?

Many professional service firms (consultancies, legal firms, accounting firms, IT companies) wonder whether ESR applies to them. In most cases, it does not, because professional services do not fall within the nine Relevant Activities. However, if a professional services firm also holds IP assets or provides distribution or service centre functions to related parties, those specific activities would be subject to ESR.

What About Trading Companies?

Standard trading companies that buy goods from third-party suppliers and sell to third-party customers are generally not subject to ESR. The distribution and service centre activity only captures companies that distribute goods purchased from related parties or provide consulting, administrative, or other services to related parties.

Filing Obligations

Regardless of whether your entity carries out a Relevant Activity, all UAE-licensed entities must file an annual ESR notification. This notification simply indicates whether you carried out any Relevant Activities during the reporting period. If you did, you must also file a detailed ESR report demonstrating that you meet the substance requirements.

Conclusion

ESR requirements in the UAE target specific types of business activities, not all businesses in general. The key is to carefully assess whether your entity carries out any of the nine Relevant Activities and earns income from them. When in doubt, consult a qualified advisor who can review your licence, activities, and income streams to determine your exact obligations. Remember, even if you are not subject to the substance test, you must still file the annual ESR notification.