UAE ESR: Core Income Group Activities (CIGAs) for Distribution & Service Centre Business
The companies in the UAE that fall within the scope of the Economic Substance Regulations (ESR) are required to meet the Economic Substance Test in relation to the relevant activity they conduct in the UAE. In line with the ESR rules, the Licensees engaged in the Distribution and Service Centre Businesses need to meet the Economic Substance Test by demonstrating that they conduct State Core Income Generating Activities (CIGAs) in the UAE, being directed and managed in the UAE, having adequate physical assets and qualified full-time staff in the UAE, and incur adequate expenditure in the UAE.
Distribution and Service Centre Business as per Economic Substance Regulations
The Distribution and Service Centre business is, in fact, two activities (distribution, service centre) clubbed together under one ESR Relevant Activity title. An entity is considered as conducting the Distribution if it buys the raw materials or finished goods from a foreign group company and distributes them. If a licensee’s only activity is purchasing goods from or distributing goods to third parties, it won’t meet the ESR requirements to be a distribution business.
A licensee is considered as carrying out a Service Centre Business if it provides consulting, administrative or other services to a foreign group company. It must be emphasized that such services should be linked with the foreign group company’s business outside the UAE. A licensee that provides services to third parties is not considered as doing service centre business as per the ESR laws in the UAE.
However, an entity that carries out a one-off transaction that comes within the scope of Distribution and Service Centre Business in Dubai, UAE need not demonstrate economic substance. However, the company is required to submit ample evidence that the transaction doesn’t fall within the regular business activity of the entity and the transaction is recharged to the relevant foreign group company.
Core Income Generating Activities of a Distribution Business
a) Transporting & Storing Goods
This CIGA involves the movement and storage of goods, components, raw materials, or finished products and the managing of risks associated with such tasks.
b) Managing Inventories
The management of inventories comprises income-generating activities such as considering minimum acceptable inventory levels, managing frequency of stocktake, determine if the storage space is used efficiently, perishability of the inventory and ensuring the proper implementation of security procedures.
c) Taking Orders
This CIGA relates to the options implemented by the entity for the order processing element of the entire fulfilment procedure. The provision of order processing can be manual or electronic.
Core Income Generating Activities of Service Centre Business
a) Providing consulting or other administrative services
This CIGA exclusively refers to the service centre business. It covers the provision of any type of service to the Licensee’s foreign group companies.
CDC LLC (UAE) buys furniture from a group company based in Bahrain and then re-sells the furniture throughout the Middle East. CDC LLC is considered as carrying out a Distribution and Service Centre Business and must meet the Economic Substance Test in the UAE.
TUV is a company based in Ajman Free Zone and its core business activity is providing HR and administrative support services to a group company based in Kuwait. The services are recharged at a cost. Though TUV is not charging a mark-up on the costs, it falls within the scope of Distribution and Service Centre Business and needs to meet the Economic Substance test in the UAE.
UK-based ABC LLC has a subsidiary in the Kingdom of Saudi Arabia (KSA) named HIG LLC. HIG LLC needs a specialist IT to support for implementing a new accounting system that will be used by HIG LLC for its KSA clients. QSA LLC is a subsidiary of HIG LLC operating in the ADGM Free Zone, Abu Dhabi and it provides audit and accountancy services to third party customers in the UAE. QSA LLC agrees to designate one of its IT support employees to HIG LLC for three months. QSA LLC recharges HIG LLC the relevant salary costs incurred. QSA LLC, in this case, doesn’t need to demonstrate economic substance in the UAE due to the following reasons:
(a) QSA LLC is not in the business of providing IT services to foreign group companies
(b) QSA does it offer/solicit such services or maintain employees to provide such services to other group companies
(c) QSA does not earn a margin on the costs recharged to HIG LLC
Choose Jitendra Chartered Accountants (JCA) to Meet UAE Economic Substance Test
The companies that conduct one or more relevant activities in the UAE are required to meet the economic substance in the UAE. Conducting CIGAs is one of the key requirements for meeting the Economic Substance Test in the UAE. The failure to meet the test may lead to hefty penalties and the actions including the exchange of information with the competent authority. To avoid such actions, the companies in the UAE require the professional assistance of a reputed ESR service provider like Jitendra Chartered Accountants (JCA). JCA has highly qualified business setup consultants and Chartered Accountants who ensure that the entities are complying with the ESR in the UAE by
- Assisting to determine if the companies can meet the ESR test
- Implement remedial measures if the companies fail to meet the ESR Test
- Help the companies file and submit annual ESR Return