In Brief

1. Cabinet Decision No. 98 of 2024 ended standalone ESR for financial years starting on or after 1 January 2023 — but substance requirements now sit inside the CT Law under Article 18.

2. A QFZP that fails adequate substance loses its 0% rate for the current period and the following four periods — five years total.

3. The FTA is conducting manual CT audits requesting audited financials, employee timesheets, board minutes, and evidence of local operating expenditure.

Date clarification The original version cited the release as '15 October 2024'. Cabinet Decision 98 came into effect on 2 September 2024 and was published in the Official Gazette on 16 September 2024. The Ministry of Finance announced publicly on 14 October 2024.

economic substance · Cabinet Decision 98 · QFZP · Article 18 · FTA audit · corporate tax

What Cabinet Decision 98 did

Cabinet Decision No. 98 of 2024 amended Cabinet Resolution No. 57 of 2020, which established the UAE's Economic Substance Regulations (ESR). The amendment removed ESR filing and compliance requirements for all financial years starting on or after 1 January 2023. Penalties previously issued for post-2022 non-compliance were cancelled, and amounts already paid were designated for refund. For financial years between 1 January 2019 and 31 December 2022, ESR obligations remain in force. The FTA retains a six-year audit window for ESR-period compliance. The change was a consolidation, not a deregulation. Substance requirements previously in a separate framework have been absorbed into the Corporate Tax Law — specifically Article 18 of Federal Decree-Law No. 47 of 2022. For compliant businesses, the change simplified reporting. For those who interpreted the headline as permission to reduce their UAE presence, it created a gap.

Adequate substance under Article 18

To maintain QFZP status, a free zone entity must satisfy the adequate substance test across four areas. Core income-generating activities (CIGA) must take place inside the free zone. Adequate assets means physical infrastructure: a dedicated office, lease, and business assets in the zone. Qualified full-time employees must be adequate in number and qualifications relative to the entity's activities. And local operating expenditure should reflect genuine spending within the UAE — not primarily management fees to an offshore parent.

What the FTA requests in audits

The first wave of substantive Corporate Tax audits is underway. These are manual inquiries requesting audited financial statements (mandatory for all QFZPs from 2025), employee timesheets and payroll records, and board minutes showing that strategic decisions were made in the UAE.

The five-year disqualification

A free zone entity that fails any QFZP condition loses its 0% rate from the beginning of the tax period of failure and is disqualified from re-qualifying for that period and the next four — five years total at 9%. The de minimis threshold adds a further point: non-qualifying revenue must not exceed the lower of 5% of total revenue or AED 5 million. A single year of cutting corners on office space, staffing, or operational presence can result in a tax liability on the entity's entire income for the next half-decade. Substance isn't an administrative formality; it's an ongoing requirement that directly determines tax treatment.

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This article is for general informational purposes only and does not constitute legal, tax, or financial advice. Readers should seek professional advice tailored to their specific circumstances. Information is current as of March 2026 and may be subject to change.