Businesses in UAE are expected to use a ‘substance over form’ approach to determine whether or not they undertake a Relevant Activity and, as a result, are within the scope of the Regulations. This determination would require the business to not only consider the activities stated under their commercial license or registration certificate but also to assess the activities carried out during a financial period.
Distribution and Service Centre Business
A Distribution and Service Centre Business refers to two distinct activities that are covered under one “Relevant Activity” heading.follow”
A Licensee is considered engaged in a “Distribution Business” if it:
- Purchases raw materials or finished products from a foreign group company; and
- Distributes those raw materials or finished goods A Licensee is considered engaged in a Service Centre Business if it provides consulting, administrative or other services to a foreign group company.
Licensees that only purchase or distribute goods to third parties, are not considered engaged in a Distribution Business. Similarly, Licensees that are engaged in the business of providing services to third parties are not considered as carrying on a Service Centre Business.
An entity that undertakes a transaction that falls within the scope of a Distribution and Service Centre Business would not be required to demonstrate economic substance in the UAE if it can evidence that the transaction was not in the ordinary course of its business (e.g. a one-off transaction) and the transaction is recharged to the relevant foreign group company at cost or less.
Licensees that are mainly engaged in Banking, Insurance, Investment Fund Management, Lease-Finance, Shipping, Intellectual Property or Headquarter Business may also purchase goods from, and/or provide services to foreign group companies as a normal part of their business operations. To prevent duplicate reporting, such Licensees are not also considered engaged in a Distribution and Service Centre Business.
Core Income-Generating Activities of a Distribution and Service Centre Business
The ESR Regulations mention the following CIGAs for a Distribution and Service Centre Business:
The following CIGAs generally apply in relation to a “Distribution Business”:
Transporting and storing goods, components and materials or goods ready for sale – refers to the movement and storage of raw materials or finished products and managing the risks associated with this.
Managing inventories – include considering minimum acceptable inventory levels, managing frequency of stock-take, whether using storage space effectively, perishability of inventory and ensuring security procedures are in place.
Taking orders – refers to the provision of the order processing element of the entire fulfilment process, whether that is manual or electronic.
The following CIGAs generally apply in relation to a “Service Centre Business”:
Providing consulting or other administrative services – covers the provision of any type of service to the Licensee’s foreign group companies.
How BSA can help you
We can assess if the entities and activities are within the scope of the economic substance regulations and/or whether the entity can benefit from any of the exemptions in the Regulations.
We can carry out a gap analysis that represents the current substance and corporate governance processes against what is required under the regulations.
We can support you in the preparation and submission of your annual notifications and economic substance report to the Regulatory Authorities.
Connect with our team at +97145707357 or send us an email at info@bsauditing.com.
