The United Arab Emirates (UAE) has been one of the popular jurisdictions for company formation for the past years. The UAE Ministry of Finance introduced the Economic Substance Regulations (ESR) on 30 April 2019, it brought increased requirements for business operational substance, a significant change to the historically loose requirements of the UAE for substance.
In line with global efforts in matching gains and revenue with business operational substance, the new economic substance law in UAE ensures that businesses that are engaged in specific activities have actual operations carried out in the region. Due to the new legislation, many businesses are now making organization-wide changes in order to remain in full compliance.
How We Can Help
Among those that are affected by the legislation are ‘Distribution and Service Centre Businesses.’ At Economic Substance Regulations, our team of regulatory experts based in UAE help businesses and other investors in performing the following to address requirements set forth in the Cabinet Resolution (no 31) of 2019 on Economic Substance:
- Review the organization’s structure and business model
- Put into consideration the business entity’s level of substance, as well as if it has to be created for the business specifically or if the substance may be outsourced
- File necessary documents such as notifications and annual reports required by the UAE authorities
- Consider all tax implications for migrating the residence of a UAE business entity to another jurisdiction (if applicable)
ESR on Distribution & Service Centre Business in UAE
Principal business activities which were identified within specific industry functions are considered relevant business activities as per the new legislation on Economic Substance and they include distribution and service centres. For this category of business, various enacted rules provide definitions of the sort of activities that constitute the CIGAs or core income-generating activities of a Distribution and Service Centre business.
As per the new legislation, a business entity has to conduct CIGAs within the UAE as the activities are critical aspects to relevant entities in the region for income generation. It’s not necessary for relevant business entities to perform all functions of relevant activities within the UAE; however, those that are key to a business entity’s function and structure have to be performed within the country.
For this purpose, all relevant income or gross income which were derived by Distribution and Service Centre businesses in UAE have to be reported to the Ministry of Finance.
In the UAE Economic Substance law, a business is in the category of “Distribution and Service Centre” if it is both or either of the following:
- providing services to a group of international companies that are outside of the UAE
- purchasing from a group of international companies and importing/storing goods or supplies in the UAE (materials or component parts for goods; goods that are ready for sale) and selling materials, goods, and/or component parts outside of the UAE
More on activities of a Distribution & Service Centre Business in UAE
All businesses that are conducting any of the following activities are to comply with ESR in UAE:
- Transporting and storage of materials, goods or component parts that are ready for sale
- Taking orders which includes providing order processing elements to an entire fulfilment process, regardless of whether electronic or manual
- Managing inventories includes managing the frequency of taking stocks, considering acceptable stock levels, whether it is utilizing storage space or business premises effectively, ensuring security procedures have been set in place, and assessing perishability of stock
- Providing administrative services such as consulting
Economic Substance Test in UAE
Businesses in the UAE that are carrying out relevant activities or a distribution & service centre business in the UAE are subject to the economic substance test which is set out in Economic Substance law. Our team can help assess if a business satisfies the economic substance test related to a “Distribution & service Centre” business. Our regulatory experts will check if your business meets the following conditions for it to satisfy the Economic Substance Test:
- The entity conducts any UAE core income-generating activity
- The entity is managed and directed in the most appropriate manner within the UAE
- The entity has sufficient operating expenses, personnel, and physical presence within the UAE
Read more: Understanding the types of penalties and how to appeal against an ESR penalty
Tailored Solutions for ESR Compliance
At Economic Substance Regulations, we have seasoned professionals who are able to provide tailored solutions in meeting the requirements of our clients in UAE – whether it is as simple as offering clarity to directors on the impact of the new legislation on their business to providing bespoke solutions in order to address compliance issues of corporates with the evolving legislation. With our economic substance regulations service in UAE, we can help your business operate in the region legally.
If you want to know more about the subject, don’t hesitate to contact us today to book a consultation!
Syed Hassan Ali carries with him an experience of 13 years in providing legal guidance and consultancy. He is a holder of two degrees, one in Business Management and the other in Economics for Engineers and Scientists. He carries an in-depth knowledge of the UAE market and continues to be an asset to businesses, providing clarity regarding applicability of the ESR regulations as well as guide them in making informed decisions.