ESR Return for Distribution and Service Center Business Relevant Activities

This blog is part of our series on UAE Economic Substance Regulations. You can read activities under Economic Substance Regulations to find relevant activity and its importance.

Here, you will be presented in brief about ESR Return for Distribution and Service Center business for your understanding.

What is Distribution and Service Center Business Activity?

A “Distribution and Service Centre” Business refers to two distinct activities that are covered under one “Relevant Activity” heading.

  1. A Licensee is considered engaged in a “Distribution Business” if the Licensee purchases raw materials or finished products from a foreign group company, and distributes those raw materials or finished goods.
  1. A Licensee is considered engaged in a “Service Centre Business” if it provides consulting, administrative or other services to a foreign group company, and those services are in connection with the foreign group company’s business outside the UAE.

What if a licensee buys goods from third parties, does it still fall under this relevant activity?

Licensees that only purchase goods from or distribute goods to third parties are not considered engaged in a Distribution Business. Likewise, Licensees that are engaged in the business of providing services to third parties are not considered as carrying on a “Service Centre Business”.

What if a licensee transacts with foreign connected party not frequently but like one-off transactions?

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 engaged in Banking, Insurance, Investment Fund Management, Lease-Finance, Shipping, or Headquarter Business may also purchase goods for, 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.

What could be the components of the ESR return with respect to Distribution and Service Center business?

As the Ministry of Finance (Competent Authority) did not come up with any particular template for ESR Return in UAE, we tried to mobilize the relevant points with respect to ESR Return from the law. The Competent Authority may be interested in knowing the details in relation to Core Income Generating Activities (CIGAs), the following are the possible points to include in the ESR Return:

For Distribution Business Activity:

  • ‘Transporting and storing goods, components and materials or goods ready for sale’ – This CIGA refers to the movement and storage of raw materials or finished products and managing the risks associated with this.
  • ‘Managing inventories’ – This CIGA could include considering minimum acceptable inventory levels, managing frequency of stocktake, whether using storage space effectively, perishability of inventory and ensuring security procedures are in place.
  • ‘Taking orders’- This CIGA refers to the provision of the order processing element of the entire fulfillment 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’- This CIGA covers the provision of any type of service to the Licensee’s foreign group companies.

Spectrum Auditing team is well equipped to advise and take care of your requirements of Economic Substance Test (ESR Test) in UAE. If you need any assistance on complying with ESR regulations or require further information on it, reach out to us on +971 4 2699329 / +971 50 9866466 or email us at info@spectrumaccounts.com to know more.

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