Understanding ESR Penalties and Appeals Process in the UAE

The Economic Substance Regulations (ESR) were introduced in the UAE to align with global tax transparency and anti-avoidance standards set by the OECD and the European Union. While many businesses have adjusted their compliance frameworks, several continue to face penalties due to misunderstanding or misapplication of the rules.

In this article, we break down the ESR penalty structure and the appeals process, helping businesses in the UAE understand their legal rights and obligations — and what to do when things go wrong.

What Are the Economic Substance Regulations?

The UAE ESR, issued under Cabinet of Ministers Resolution No. 57 of 2020 and its related Ministerial Decision No. 100 of 2020, require UAE-based entities that conduct certain “Relevant Activities” to have adequate economic substance in the UAE.

 Relevant Activities include:

• Banking
• Insurance
• Investment fund management
• Lease-finance business
• Headquarters business
• Shipping
• Holding company business
• Intellectual property (IP) business
• Distribution and service center business

Entities engaged in these activities must meet substance requirements, including:

• Core Income-Generating Activities (CIGA) in the UAE
• Adequate local resources (staff, premises, expenditures)
• Annual ESR Notification
• Economic Substance Report (where applicable)

ESR Penalties in the UAE

Failure to comply with ESR requirements can lead to significant administrative penalties, along with reputational and operational risks.

Common Violations & Penalties

These penalties are imposed by the Federal Tax Authority (FTA), acting as the National Assessing Authority.

Legal Grounds for Appealing ESR Penalties

The ESR framework provides businesses the right to appeal a penalty decision if:

• They believe the penalty was issued in error
• They have valid reasons for non-compliance (e.g., force majeure)
• They can demonstrate compliance that was not properly assessed
• The FTA misapplied the law or procedural rules

Appeals must be well-grounded in fact and law, supported by documentation, and presented within the legal timeframe.

ESR Appeals Process in the UAE

Step 1: Notification of Penalty

Once a penalty is imposed, the FTA notifies the business via its official portal. The notification includes:

• The type of violation
• The amount of the penalty
• The legal basis
• The timeframe for response

Step 2: Filing an Appeal (Reconsideration Request)

The first recourse is to file a Reconsideration Request with the FTA.

• Timeline: Must be filed within 20 business days from the date of penalty notification.
• Submission: Through the FTA’s online ESR portal.
• Required Documents:
  • Detailed explanation of the issue
  • Supporting legal and factual evidence
  • Power of Attorney (if submitted by a legal representative)

Step 3: FTA Review

The FTA will review the request and make a decision within 20 business days of receiving the complete submission. The authority may:

• Cancel the penalty
• Amend the penalty
• Uphold the original decision

The decision is communicated through the FTA portal.

Step 4: Appeal to the Tax Disputes Resolution Committee (if required)

If the reconsideration request is rejected or the business is not satisfied with the outcome, the next step is to appeal to the Tax Disputes Resolution Committee (TDRC) under Federal Law No. 7 of 2017.

• Timeline: Within 20 business days from the FTA’s response.
• Representation: Legal representation is advisable at this stage.
• Outcome: TDRC decisions can be binding but may also be appealed to UAE courts in some cases.

How to Minimize ESR Risk

To avoid ESR penalties and ensure long-term compliance, businesses should:

• Determine whether they are conducting a Relevant Activity
• File ESR Notifications and Reports accurately and on time
• Maintain documentary evidence of economic substance in the UAE
• Conduct internal ESR compliance audits
• Seek professional legal advice where the business structure or activity is complex

How GCC Law Can Help

At GCC Law, we assist companies across the UAE with:

• ESR compliance assessments
• Preparation and submission of ESR filings
• Legal reviews of ESR penalty notices
• Drafting and filing ESR appeals
• Representing clients before the FTA and Tax Disputes Committees

Whether you’re a free zone entity, a holding company, or a multinational group, we ensure your ESR obligations are met — and your rights protected.

Final Thoughts

Economic Substance Regulations are here to stay — and enforcement is only getting stricter. Businesses must move from reactive compliance to proactive legal management. If you’ve received an ESR penalty or need guidance on staying compliant, timely legal advice can make the difference between a costly error and a favorable resolution.

Contact GCC Law today for expert assistance with ESR compliance and appeals in the UAE.