The UAE Economic Substance Test requires a Licensee to demonstrate that the Licensee is directed and managed in the UAE in relation to the relevant activity, Core Income Generating Activities (CIGAs) are carried out in the UAE, employed adequate qualified full-time staff in the UAE, incurred adequate expenditure and has adequate physical assets in the UAE. Conducting the CIGAs is one of the key requirements for a Licensee to meet the Economic Substance test in the UAE. The ESR Law has provided a list of CIGAs corresponding to each relevant activity including Shipping Business.
Shipping Business as per Economic Substance Regulations
A Shipping Business falls within the scope of ESR if the company is operating one or more ships in international traffic for the purpose of transportation of either passengers or cargo or both. The ESR rules have also included the following activities under the definition of Shipping Business if such activities are undertaken by the Licensee in relation to the business of operating a ship or ships in international traffic. The activities are,
- Rental on a charter basis of ships
- Sale of tickets or similar documents
- Use, maintenance or rental of containers
- Management of the crew of ships
For the consideration of the ESR, the definition of a Ship doesn’t include the ships used for fishing purposes, small vessels (tonnage doesn’t exceed 10 tonnes), and leisure vessels (cruise ships, private yachts).
The activity of chartering ships on a bareboat basis won’t be considered as Shipping Business because the entity that charters the ship is not in charge of operating the vessel. However, the Chartering of Ship falls within the scope of Lease-Finance Business as per the ESR rules.
Travel agencies and international shipping agencies that sell tickets to passengers for international travel won’t be considered as conducting Shipping Business in the UAE. The companies that arrange ships to transports their own goods to foreign countries by sea won’t be treated as engaged in the Shipping business in the UAE unless they operate their own ships for the transportation of goods.
Core Income Generating Activities of Shipping Business
1. Managing Crew
This CIGA involves the sourcing, recruitment, selection, deployment, scheduling, training, and ongoing management of the crew on the ships. The crew also include the related administration staff such as payroll, insurance, tax, and social security withholding and logistics (travel arrangements, temporary accommodation, etc.)
2. Overhauling & Maintaining Ships
The CIGA includes the responsibility of and the associated decision-making related to the lifting of ships from water for maintenance and general ship maintenance.
3. Overseeing & Tracking Shipping
This activity includes managing and overseeing logistical considerations of the international transportation cargo and passengers by ship such as managing and tracking the movement of vessels.
4. Determining What Goods to Order & When to Deliver Them, Organising & Overseeing Voyages
This CIGA comprises activities such as determining how a ship is to be utilized, the types of cargo acceptable, and the scheduling of the delivery of such cargos, managing the logistical aspects of the operation of ships, determining which routes to use, and ensuring necessary contingency arrangements are made.
Examples to Determine If a Licensee is Conducting CIGAs of Shipping Business in the UAE
Example 1
A company by the name ABC LLC owns and operates a ship in international traffic to carry out the business of transporting passengers from the UAE to other countries in the Middle East. Since ABC LLC’s main business is operating a ship in international traffic for the transportation of passengers, it comes within the scope of ESR Regulations and needs to meet the Economic Substance Test in the UAE.
Example 2
PQR LLC’s main business is providing and managing the crew of another company named BCA LLC. PQR LLC doesn’t operate the ship and is also not related to BCA LLC. This means that PQR LLC is not considered to carry on a Shipping Business because it does not operate the ships in which its crew is being deployed. The ESR Law in the UAE doesn’t consider the mere provision of crew and ship management services as “operating a ship. Moreover, PQR LLC doesn’t fall within the scope of Distribution and Service Centre Business as it is not related to BCA LLC.
Example 3
XYZ LLC has chartered a ship it owns to Cargo LLC on a bareboat basis and Cargo LLC uses and operates that ship to transport cargo from the UAE to other countries. In this case, XYZ LLC is not considered as carrying out the shipping business as it is not operating the ships it owns. However, Cargo LLC will be considered as engaged in Shipping Business and is required to meet the Economic Substance Test in the UAE as it operates the ship it has chartered for international cargo transportation. The ESR Law doesn’t give importance to the fact that Cargo LLC doesn’t own the ship.
Why Choose Jitendra Chartered Accountants?
The offshore, Mainland, and free zone companies in the UAE that carry out the Relevant Activities including the Shipping Business activity are required to meet the Economic Substance Test in the UAE. The businesses need to prepare strategies to ensure compliance with the ESR rules as well as to meet the Economic Substance Test in the UAE. The failure to meet the test will attract penalties and other actions by the Regulatory Authority. This is where the companies that fall within the scope of the ESR in the UAE require the professional assistance of ESR consultants.
Jitendra Chartered Accountants (JCA) is one of the best ESR consultants in Dubai, UAE that helps the companies ensure ESR compliance. The JCA’s highly qualified auditors and business setup consultants are well-versed in the procedures and regulations related to the ESR rules. JCA assists the Licensees by
- Assessing if the companies can meet the UAE Economic Substance Test
- Prepare strategies if the companies fail to meet the Economic Substance Test
- Assisting in filing the annual ESR Return to the relevant Regulatory Authority