Economic Substance after Corporate Tax: Transformation of the Regime and the Real Burden on Business in the UAE in 2026

1. Transformation of Economic Substance: from formal reporting to systemic tax architecture

The Economic Substance Regulations (ESR) regime, introduced in 2019 as a tool to combat artificial structures and “shell companies,” formally ceased to apply to financial periods ending after 31 December 2022.

However, the cessation of ESR reporting does not mean the cessation of the requirement for economic presence. An institutional transformation has occurred:

• the separate regulatory ESR regime disappeared as an independent framework,

• but the very logic of economic reality of business has been integrated into the corporate taxation system,

• the substance criteria have become part of the assessment of status, tax base, and eligibility for reliefs.

If previously the question sounded like “does the company fall under ESR and has it filed the report,” then in 2026 the question sounds differently:

can the company prove that profit is generated where it claims?

Economic substance has ceased to be a reporting formality. It has become part of the tax jurisdictional logic.

2. Corporate tax as a new mechanism for verifying business reality

With the introduction of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, corporate tax has become the primary instrument for assessing business structures in the UAE.

Unlike ESR, which examined the “existence of activity,” corporate tax analyses:

• where functions are performed,

• who bears risks,

• who owns assets,

• where strategic decisions are made,

• and whether the declared tax regime is justified.

This means the following:

1. Tax review now analyses the economic logic of operations, not merely formal indicators.

2. Any intra-group transaction automatically becomes subject to substance analysis.

3. The absence of a documented business model creates a risk of profit recharacterisation or loss of preferential status.

Corporate tax in the UAE is not merely a rate of 0% or 9%. It is a regime of documented responsibility.

3. QFZP and the illusion of a zero rate

The status of Qualifying Free Zone Person (QFZP) has become a central element of the tax architecture of Free Zone companies.

The key point:

the zero rate is not a characteristic of the zone, but a conditional regime requiring annual compliance with criteria.

To apply 0%, the following are required:

• compliance with the list of qualifying income,

• adherence to accounting and reporting requirements,

• fulfilment of substance conditions,

• absence of disqualifying transactions,

• proper interaction with related parties.

In practice, risks arise in three areas:

1. Mixing qualifying and non-qualifying income without structuring.

2. Insufficient documentation of functions and management control.

3. Absence of evidentiary support for related-party transactions.

Loss of QFZP status means transition to the standard corporate tax rate and potential retrospective adjustment.

Thus, economic substance is embedded in the 0% regime.

4. Transfer Pricing: the hidden center of gravity of substance in 2026

If a company has related parties, a holding structure, or international operations, the question of substance inevitably moves into the field of transfer pricing.

Ministerial Decision No. 97 of 2023 establishes documentation requirements and the arm’s length principle.

The economic logic here is built on analysis of:

• Functions,

• Assets,

• Risks,

• Management control.

If a company pays:

• management fees,

• royalties,

• interest on intra-group loans,

• service payments,

it must prove:

• that the services were actually rendered,

• that they have economic value,

• that their price is at market level,

• that the functions were indeed performed by the declared party.

Absence of substance in transfer pricing does not lead to an ESR penalty, but to an adjustment of the tax base.

5. Banking compliance: ESR without ESR

The UAE banking system applies a risk-based approach.

When opening and servicing corporate accounts, banks analyse:

• place of decision-making,

• presence of employees,

• reality of operations,

• counterparty profile,

• economic rationale of cash flows.

Absence of substance often leads to:

• account freezing,

• enhanced monitoring,

• additional document requests,

• refusal of service.

Thus, economic substance has become part of the AML/KYC profile of a company.

6. Administrative sanctions within Corporate Tax

Cabinet Decision No. 75 of 2023 establishes a system of administrative penalties for violations related to corporate tax.

Sanctions apply for:

• late registration,

• absence of records and documentation,

• late filing of returns,

• failure to provide information upon request,

• violation of accounting procedures.

Economic substance directly affects these risks:

if a company does not maintain structured accounting and does not retain evidence of the reality of operations, it automatically increases the likelihood of administrative liability.

In 2026, the main financial burden arises not from the rate, but from violation of procedures.

7. Historical ESR obligations and retrospective risks

Although ESR reporting has ceased for new periods, historical obligations for periods up to 31.12.2022 remain legally relevant.

Companies must be prepared to confirm:

• correctness of previously filed notifications,

• compliance with economic activity requirements,

• accuracy of management data,

• absence of distortions in information disclosure.

Since the mechanism of exchange of tax information between jurisdictions is strengthening, retrospective weakness of the structure may affect international reviews.

8. Holding structures and Place of Effective Management

For holding and investment structures, the question of Place of Effective Management (POEM) becomes key.

Tax and regulatory authorities analyse:

• where board meetings take place,

• where strategic decisions are made,

• who signs key documents,

• where management control is exercised.

Formal presence of a resident director without real participation does not create substance.

In 2026, a holding without a management center becomes a high-risk structure.

9. Practical model of a sustainable structure in 2026

Companies that pass reviews without complications typically possess the following characteristics:

1. Documented corporate discipline (resolutions, minutes, authorities).

2. Tax calendar with systematic recording of calculations.

3. Control over related parties and arm’s length transactions.

4. Actual presence of management.

5. Ready due diligence and banking documentation file.

Economic substance is no longer a formality and not a report.

It is a combination of managerial, tax, and documentary infrastructure.

10. Strategic conclusion of 2026

ESR as a separate regime has completed its existence.

But economic substance has not disappeared — it:

• is embedded in corporate tax,

• affects the QFZP regime,

• determines transfer pricing,

• shapes the banking risk profile,

• becomes a factor of investment valuation.

In 2026, those who win are not those who “are not required to file ESR,”

but those who are able to prove the reality of their business at the level of functions, risks, and assets.