This article dives deep into the Economic Substance Regulations (ESR) in the UAE, specifically for Distribution and Service Centre Businesses ESR. We’ll provide a clear understanding of what these businesses entail, the activities covered under ESR, and how to determine if your company falls under these regulations.

What is a Distribution and Service Centre Business?

The UAE categorizes “Distribution and Service Centre Business” as a single “Relevant Activity” encompassing two distinct operations:

  • Distribution Business: This involves purchasing goods from a foreign connected person (group companies), importing them into the UAE, and then reselling them outside the UAE.
  • Service Centre Business: This refers to providing services to a foreign connected person in connection with their business operations outside the UAE. These services can be administrative, consultative, or any other relevant support.

Examples of Distribution and Service Centre Activities:

  • Scenario 1 (Distribution Business): A UAE based company, ABC LLC, purchases product X from group companies in China and resells them to other group companies and customers in Africa. This falls under the distribution business, making ABC FZCO subject to ESR in UAE.
  • Scenario 2 (Service Centre Business): ABC LLC, registered in the UAE, whose main activity is to provide administrative and support services to its head office in India at cost. These activities fall under the service centre business, subjecting ABC LLC to ESR requirements.

Important Considerations:

  • Licensees involved in Banking, Insurance, Investment Fund Management, Lease-Finance, Shipping, or Headquarter Business may also provide services or purchase goods for foreign group companies. However, to avoid duplicate reporting, they are not considered Distribution and Service Centre Businesses.
  • Businesses buying and selling goods from/to third parties or providing services to them are not subject to ESR regulations as a Distribution and Service Centre Business.

Avoiding Duplicate Reporting:

The ESR aims to prevent companies from establishing a mere physical presence without demonstrating a substantial economic footprint. Therefore, licensees already subject to ESR for other relevant activities won’t face duplicate reporting for distribution and service centre operations that are incidental to their core business.

When Does ESR Apply?

The economic substance requirements for Distribution and Service Centre Businesses apply to UAE entities whose primary activity falls under distribution and/or service centre operations.

Examples to Clarify ESR Applicability:

  • Scenario 3 (Not a Distribution and Service Centre Business): ABC LLC is a UAE based technology service provider employing staff and owning its business premises. A related US based company requires a temporary Designing specialist. ABC LLC hires an employee in the UAE to assist the US company for 6 months, with the US company reimbursing the cost. Since providing Designing Specialist is not ABC LLC’s main activity, it’s not considered a Distribution and Service Centre Business and therefore not subject to ESR.
  • Scenario 4 (Not Meeting ESR Requirements): ABC LLC, a UAE-based distribution company, distributes raw materials purchased from group entities in Asia to other group entities in Europe. They outsource transportation to a non-resident UAE company (XYZ Ltd) and storage to a third-party company (LMO Ltd) in the UK, with LMO Ltd liaising directly with the receiving entity for deliveries. As the board and employees of ABC LLC are not involved in these crucial activities, they wouldn’t satisfy the economic substance requirements.

Conclusion

Understanding the ESR and its implications for Distribution and Service Centre Businesses in the UAE is crucial. By carefully analyzing your core activities, related party transactions, and the level of economic substance demonstrated within the UAE, you can determine your ESR obligations and ensure compliance. Consulting with qualified professionals specializing in ESR like ProAct can provide valuable guidance and ensure a smooth compliance process.

Ref: The-UAE-Economic-Substance-Regulations-Notification-Guidance.pdf (mof.gov.ae)