UAE Economic Substance Regulations: 2024 Amendments and Strategic Implications for Indian Enterprises

Introduction

In September 2024, the UAE government took a major step by issuing Cabinet Decision No. 98 thus fundamentally changing how Economic Substance Regulations (ESR) apply to businesses in UAE.[i] The decision draws a bright line on December 31 2022 as the entities established after this date are exempted from the ESR notification and reporting labyrinth that companies have been navigating since 2019.[ii] This aligns with the Federal Corporate Tax Law that came into effect during June 2023 thus creating what many have called a unified compliance framework.[iii]

Significance of this for Indian companies? Bilateral trade between India and UAE has crossed over USD 100 billion in Fiscal Year 2024-25.[iv] From the time Comprehensive Economic Partnership Agreement (CEPA) was signed in 2022 till present, commercial activity between both the countries have accelerated significantly. This regulatory change does not just reduce the paperwork but it also fundamentally altered how businesses should think about UAE entity structuring and tax compliance. This regulatory change curbs the administrative burdens substantially while keeping historical accountability intact. Let us explore ESR’s origins, dissects what Cabinet Decision No. 98 means, analyze how it fits into corporate tax regulations and outline what Indian companies should be thinking about right now.

 

The Origins of ESR: Responding to International Pressure

The UAE was increasingly under the spotlight in 2019. The OECD’s Base Erosion and Profit Shifting (BEPS) initiatives and the EU Code of Conduct Group raised doubts as to whether companies claiming UAE residence were conducting bona fide business there or not. Cabinet Resolution No. 31 of 2019 established ESR to address these concerns head-on, focusing on targeted “Relevant Activities” such as banking, insurance, shipping, headquarters operations, intellectual property holding, distribution centres and fund management.[v]

What did compliance look like? Companies earning Relevant Income had to prove genuine economic presence through adequate office space, qualified full-time employees, proportionate operating expenses, and most critically local decision-making as opposed to overseas control. The filing process involved two stages, first an ESR Notification within six months of the end of fiscal year and, second a detailed ESR Report six months later.

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The penalties were significant. Missing notifications could cost AED 50,000. Insufficient reports meant monthly fines of AED 20,000 accumulated and capped at AED 400,000 annually. Over 10,000 organisations navigated this compliance exercise by the end of 2022, with free zone-based Indian SMEs such as DMCC and JAFZA facing heavy costs. Take the case of  an Indian IT services company with a Dubai branch, it had to keep parallel documentation for both UAE’s ESR and India’s Place of Effective Management (POEM) regulations thereby creating duplicative costs and administrative headaches.

What Cabinet Decision No. 98 Changes

The decision has three tangible effects. ESR obligations now stop at fiscal years ending December 31, 2022. Any company with fiscal year beginning from January 1, 2023 or later will face zero ESR filing requirements. The Federal Tax Authority (FTA) must waive all administrative penalties imposed for post-2022 non-compliance and refund previously collected fines.[vi] This penalty relief offers immediate liquidity and thus we can think of it as unexpected working capital suddenly available for expansion.[vii]

Historical accountabilities still stay in place and companies must still satisfy outstanding ESR requirements for 2019-2022 and keep records like board minutes, employment contracts and expense documentation for 12 years from original deadlines.

The Ministry of Finance clarified something important here that this is not just abandoning substance requirements rather these principles have migrated into the corporate tax framework itself through transfer-pricing rules under Cabinet Decision No. 49 of 2023 and general anti-avoidance provisions. Businesses no longer maintain separate ESR filings alongside tax compliance. Substance checks are embedded directly within corporate tax obligations thereby ending redundant paperwork while preserving the UAE’s OECD BEPS commitments.

Integration with Corporate Tax

The UAE’s corporate tax system established by Federal Decree-Law No. 47 of 2022 levies 9 percent on profits exceeding AED 375,000 with zero percent below that threshold. Free Zone Persons who enjoy zero-percent taxation on Qualifying Income must maintain adequate substance. ESR principles resurfaces here under a different name as Free Zone entities need dedicated office space, qualified employees, and adequate operating expenditure levels that resembles the old ESR requirements.

Transfer-pricing guidelines via Cabinet Decision No. 49 of 2023 call for arm’s-length documentation for related-party transactions. The General Anti-Avoidance Rule (GAAR) within the Corporate Tax Law allows the FTA to disregard transactions structured primarily to avoid taxes. This addresses OECD concerns about treaty shopping while streamlining compliance. Companies now thus face one set of rules instead of navigating both ESR and tax requirements separately.

What This Means for Indian Companies

India and the UAE have developed one of Asia’s most vibrant commercial relationships. Trade crossed USD 100 billion in FY 2024-25 and the UAE is India's fourth-largest source of FDI at USD 3.35 billion.[viii] Thus, Indian enterprises gain in several concrete ways.

Cutting separate ESR filings reduces compliance costs by 40 to 50 percent for groups with multiple entities or complicated free-zone structures. Companies that paid post-2022 penalties get refunds thus making cash available for expansion, technology upgrades, or market diversification. A unified tax regime simplifies decisions about onshore versus free-zone operations because substance requirements are uniform under corporate tax rather than fragmented systems.

Challenges still remain though. The FTA continues to have complete audit authority over 2019-2022 ESR periods. Have you kept board minutes from 2020? Are employment contracts from that period accessible? These mundane questions could decide penalty exposure. Indian companies need to reconcile UAE corporate tax with India’s POEM regulations, GAAR provisions and equalization levy on digital services to avoid double taxation.

Access to preferential withholding rates under the India-UAE Double Taxation Avoidance Agreement (DTAA) amended by the 2016 Protocol is subject to Limitation of Benefits clauses with requirement for true commercial substance. Sectors where Indian companies have significant footprints such as pharmaceuticals (USD 1.5 billion in exports to UAE in 2023), IT services, textiles, gems and jewellery can particularly benefit as they will expand operations or diversify into Gulf markets.

Roadmap for Indian Firms

Where should Indian businesses start? Engage licensed consultants to audit ESR compliance for 2019-2022. Identify documentation gaps, substance shortfalls and penalty exposure prior to the FTA starting investigations.[ix] Even past filings that appeared adequate may have issues under evolved regulatory expectations. Companies eligible for penalty refunds should move quickly through the FTA’s e-refund portal as specific timelines and documentation requirements are being completed so this is money just sitting on the table.

Reevaluate post-2023 entity forms within the corporate tax framework. For qualifying firms targeting Qualifying Free Zone Person status, specialised office accommodations and sufficient operating expenses need to make sure alignment with Cabinet Decision No. 55 of 2023 standards. For onshore operations, ensure transfer-pricing documentation complies with arm's-length principles and essential business activities really take place in the UAE. It is not merely compliance rather it is maximising tax efficiency while maintaining DTAA access.

Would your operations pass scrutiny if the FTA or Indian tax authorities conducted a joint audit tomorrow? That’s the test.

Make effective use of bilateral mechanisms. The DTAA’s Limitation of Benefits clauses demands genuine commercial activity for preferential rates. Indian companies should make use of Advance Pricing Agreements under Section 92CC of India’s Income Tax Act to lock in transfer-pricing methodologies for 5-10 years.[x] Approaching both UAE and Indian tax administrations with advance rulings or pre-filing consultations can avoid expensive conflicts before they arise. This transforms regulatory compliance from defensive burden into strategic advantage.        

Conclusion

Cabinet Decision No. 98 of 2024 marks the UAE’s transition toward a mature, integrated tax system folding substance requirements into broader corporate tax compliance. For Indian businesses, the path to establishing UAE operations just became significantly simpler but only if companies carefully resolve their 2019-2022 ESR obligations and structure new entities with the updated corporate tax rules in mind. Consider that India and the UAE are actively working to diversify their trade relationship beyond oil and precious metals. Companies that master these regulatory changes now will find themselves ahead of competitors trying to capitalise on what has become one of Asia’s most dynamic bilateral trade relationships.

Author: Krish Arya, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[i]  Cabinet Decision No. 98 of 2024, UAE Ministry of Finance (Sept. 2, 2024), https://mof.gov.ae/economic-substance-regulations/ 

[ii] PwC Middle East, Cabinet of Ministers Issued Decision No. (98) of 2024, UAE Economic Substance

Regulations (Oct. 16, 2024),

https://www.pwc.com/m1/en/services/tax/me-tax-legal-news/2024/cabinet-of-ministers-issued-decision-no98-of-2024-uae-economic-substance-regulations.html 

[iii] Federal Decree-Law No. 47 of 2022 on Taxation of Corporations and Businesses, UAE Federal Gazette (Dec.

9, 2022). https://mof.gov.ae/wp-content/uploads/2022/12/Federal-Decree-Law-No.-47-of-2022-EN.pdf 

[iv] Embassy of India, UAE, Bilateral Economic & Commercial Relations (Aug. 30, 2024),

https://www.indembassyuae.gov.in/bilateral-eco-com-relation.php 

[v] Cabinet Resolution No. 31 of 2019 on Economic Substance Regulations, UAE Ministry of Economy (Apr. 30,

2019), https://mof.gov.ae/economic-substance-regulations/ 

[vi] Baker McKenzie, Restriction on Applicability of Economic Substance Regulations (Oct. 15, 2024),

https://insightplus.bakermckenzie.com/bm/tax/united-arab-emirates-restriction-on-applicability-of-economic-substance-regulations 

[vii] Deloitte Middle East, Amendment to the Economic Substance Regulations (Sept. 15, 2024),

https://www.deloitte.com/middle-east/en/services/tax/perspectives/amendment-to-the-economic-substance-regulations.html 

[viii] India Brand Equity Foundation, Exploring India UAE Trade and Economic Relations (July 8, 2024),

https://ibef.org/indian-exports/india-uae-trade 

[ix] Finance Act 2016, § 165A (equalization levy on digital services),

https://incometaxindia.gov.in/pages/acts/equalisation-levy.aspx 

[x] Income Tax Act 1961, § 92CC (Advance Pricing Agreement regime for 5–10 year transfer-pricing certainty),

https://www.indiacode.nic.in/bitstream/123456789/2435/1/a1961-43.pdf