The companies in the UAE that carry out one or more relevant activities and earn income from relevant activity during the financial year are required to meet the Economic Substance Test set out in the regulations in relation to each activity. As per the Economic Substance Regulations (ESR) requirement, the mainland, free zone and offshore companies should self-assess how they can meet the UAE Economic Substance Test in the relevant activities such as Banking, Insurance, Investment Fund Management, Lease-Finance, Headquarters Business, Shipping Business, Holding Company Business, Intellectual Property Business, and Distribution and Service Centre Business. In this background, it is worthwhile to shed light on the conditions laid out for the Distribution and Service Centre Businesses in the UAE to meet the Economic Substance Test.
Also read: A Guide to the Economic Substance Test in the UAE
The Definition of Distribution and Service Centre Business as per Economic Substance Regulations
As per the UAE ESR guideline, the distribution and service centre business refers to the twin activities of distribution and services. A Licensee is considered to be carrying out the distribution business if it purchases raw materials or finished products from a foreign group company, and distributes those raw materials or finished goods. If the company buys goods from or distributes the goods to a third party then it is not considered as carrying out a distribution business as per ESR.
A company in the UAE comes within the scope of Service Centre business if it provides consultation or administrative services to a foreign group company and the services should match with the foreign entity’s business. If the company is providing its services to a third party it won’t be considered as carrying out the service centre business and doesn’t need to demonstrate adequate economic substance in the UAE.
Core Income Generating Activities of a Distribution and Service Centre Business
Core Income Generating Activities (CIGAs) are one of the top parameters for demonstrating economic substance in the UAE. The Licensee needs to undertake CIGAs in relation to the relevant activities. The CIGAs are those activities that are of key significance to the gross income earned from the Relevant Activity.
Also read: What are the Relevant Activities Under Economic Substance Regulations in the UAE?
a) CIGAs for Distribution Business
- Transporting and storing goods, components, and materials or goods ready for sale
- Managing Inventories
- Taking orders
b) CIGA for Service Centre Business
- ‘Providing consulting or other administrative services to foreign group companies.
How to Assess Whether A Company is Conducting Distribution & Service Centre Business
a) Scenario 1
Consider the example of a company named ABCD LLC which purchases furniture from a group company in Egypt and re-sells it throughout the Middle East. In this case, ABCD LLC is considered as generating income from the Distribution business.
b) Scenario 2
Imagine a company named XYZ LLC which operates from Ajman Free Zone, UAE. The company provides HR and administrative services to a group company based in Bahrain and the services are recharged at cost. Even though XYZ LLC is not charging mark-up costs on the foreign company, it will be deemed as carrying out the service centre business and must meet UAE Economic Substance Test.
What Should Companies Do to Meet the UAE Economic Substance Test?
The companies that conduct one or more relevant activities in the UAE are required to,
- Assess the amount and type of income earned from the Relevant Activity
- Hold board meetings with directors who are physically present in the UAE
- Make sure that the minutes of the board meeting are signed and maintained in the UAE
- Determine the amount and type of expenses and assets in UAE in relation to the relevant activity
- Determine the number of full-time employees who are in charge of conducting the relevant activity
How Jitendra Chartered Accountants Help Companies Meet Economic Substance Test?
The UAE enacted the Economic Substance Regulations to streamline the economy in accordance with the global standards and to curb harmful tax practices. The companies that conduct the relevant activities are required to meet the UAE Economic Substance Test. Since the ESR is a new regulation, the companies might be unsure about how to meet the Economic Substance Test and what steps are required to be taken if they fail to demonstrate adequate economic presence in the UAE. It is in this situation that a professional audit firm in Dubai like Jitendra Chartered Accountants comes to the aid of the UAE businesses. JCA has a team of chartered accountants and business setup consultants who are highly qualified to help the businesses in the assessment of relevant activities and annual filing of ESR Returns. JCA assists the companies in
- Assessing whether the company is under the scope of ESR in the UAE
- Check whether your company can meet the UAE Economic Substance Test
- Provide suggestions to pass the Economic Substance Test
- File annual UAE ESR Return