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.
- 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.
- 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.
Economic Substance Test for Distribution and Service Center Business
How to Test Economic Substance (ESR Test) for Distribution and Service Center Business in UAE and what are the documentation requirements to meet the Test?
Following are some of the important areas to demonstrate the Economic substance to be able to meet ESR Testfor Distribution and Service Center Business in UAE:
(a) if the entity conducts State Core Income-Generating Activity in the State.The entity needs to make sure that the following activities are conducted within UAE to be able to meet UAE Economic Substance Test:
For Distribution Business Activity:
- Transporting and storing goods, components and materials or goods ready for sale – This steprefers to the movement and storage of raw materials or finished products and managing the risks associated with this.
- Managing inventories – This 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 refers to the provision of the order processing element of the entire fulfillment process, whether that is manual or electronic.
For Service Centre Business Activity:
- Providing consulting or other administrative services- This step covers the provision of any type of service to the Licensee’s foreign group companies.
(b) Board Meetings: if the entity is directed and managed in the State in relation to that activity. This is considered as satisfied if the following conditions are met:
- the Licensee’s board of directors meets in the State at an adequate frequency having regard to the amount of decision-making required at that level. Here adequate frequency is more important, one can go with the number of meetings mentioned in the Memorandum of Association or other governing document or as required by the need of the business.
- at such board meetings mentioned above, there is a quorum of directors physically present in the State. The directors should be physically present here in UAE to meet this condition. Hence maintaining sufficient documentary evidence like boarding passes of the directors if they are not UAE residents and accommodation bills while they were in UAE to substantiate this fact is important.
- the meetings are recorded in written minutes and signed by the directors attending the meetings. Hence, maintenance of appropriate minutes of the board meetings in a proper way becomes most important.
- the minutes of such board meetings described above record the making of strategic decisions of the Licensee at the meeting. The minutes should record all the decisions that are taken during the meeting like business plans, yearly budget plans, new product line or service line considered, changes in the senior management team, etc,.
- the directors of the Licensee have the necessary knowledge and expertise to discharge the duties of the board.
- the minutes of all board meetings and the records of the Licensee are kept in the State. Those minutes of the meetings shall be kept physically in the office in UAE.
- In the case of branch offices and representative offices of foreign companies and other commercial companies that do not have a board of directors but rather are managed and operated by a single manager, such manager shall be physically present in the State when taking key decision relating to the management and operation of these entities.
(c) Employees: Based on the level of the Relevant Activity, if there is an adequate number of qualified full-time employees in relation to that activity who are physically present in the State (whether or not employed by the Licensee or by another entity and whether on temporary or long-term contracts), or adequate level of expenditure on outsourcing to third party service providers, whose activities, employees, expenditure, and premises are in the State; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
(d) Operating Expenses: if there is adequate operating expenditure incurred by it in the State, or adequate level of expenditure on outsourcing to third party service providers whose activities, employees, expenditure and premises are in the State; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
(e) Physical Assets: if there are adequate physical assets in the State or adequate level of expenditure on outsourcing to third party service providers in the State, for the activities of the Licensee;
(f) in the case of State Core Income-Generating Activity carried out for the relevant Licensee by another entity, if it is able to monitor and control the carrying out of that activity by the other entity.
(g) If the Relevant Activity is outsourced: A Licensee can outsource activities relating to employees, operating expenses and having assets in UAE while conducting the relevant activities. Where a Relevant Activity is outsourced by a Licensee, the Licensee must demonstrate the following:
i). the Relevant Activity that is outsourced is a Core Income-Generating Activity being carried out in the State.
ii). the Licensee has adequate supervision of the Relevant Activity outsourced.
iii).the Licensee shall submit to the Regulatory Authority a report containing information in relation to the level of resources employed by the third party service provider to which the Relevant Activity is being outsourced, demonstrating that the service provider’s activities, employees, operating expenditures and premises in the State are adequate in relation to the level of Relevant Activity outsourced.
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 [email protected] to know more.
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