Distribution and Service Centre Business for ESR

A “Distribution and Service Centre” Business for ESR 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.
  2. A Licensee is considered engaged in a “Service Centre Business” if it provides consulting, administrative or other services to a foreign group company. Also those services are in connection with the foreign group company’s business outside the UAE.
    Storage-Distribution-Business
    Storage & Distribution Business ESR

Licensees that undertake the above activities for a third party are not considered undertaking a “Relevant Activity”.

If the above mentioned activity is conducted as one of transactions and re-charging foreign group company at cost or less are not considered undertaking a “Relevant Activity”.

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. Such Licensees are not also considered engaged in a Distribution and Service Centre Business to avoid duplicate reporting.

Core Income Generating Activities of a Distribution and Service Centre Business for ESR:

The Regulations mention the below CIGAs for Distribution and Service Centre Business. The CIGA in relation to “Distribution Business”:

  •  ‘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, 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 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’ – This CIGA covers the provision of any type of service to the Licensee’s foreign group companies.

Examples:

  1. XYZ LLC (UAE) buys furniture from a group company based in Lebanon and then re-sells the furniture throughout the Middle East. XYZ LLC is considered as carrying on a Distribution and Service Centre Business.
  2. The main business activity of TUV LLC (a company established in the Ajman Free Zone) is to provide HR and administrative support services to a group company based in Kuwait, which are recharged at cost. Despite TUV LLV not charging a mark-up on the relevant costs, TUV LLC is considered as engaged in a Distribution and Service Centre Business.
  3. HIG LLC, the KSA subsidiary of ABC LLC (a company established in the United Kingdom), requires specialist IT support with the implementation of a new accounting system which will be used by HIG LLC in the provision of services to KSA based clients. QRS LLC (a subsidiary of HIG LLC established in the Abu Dhabi General Markets Financial Free Zone) provides audit and accountancy services to third party customers in the UAE, and agrees to second one of its IT support staff to HIG LLC for three months. QRS LLC recharges HIG LLC the relevant salary costs incurred. As QRS LLC is not in the business of providing IT services to foreign group companies, nor does it offer/solicit such services or maintain employees to provide such services to other group companies, and because it does not earn a margin on the costs recharged to HIG LLC, QRS LLC is not considered as carrying on a Distribution and Service Centre Business.

Here are the other “Relevant Activities” under ESR:

Relevant Activities under Economic Substance Regulations:

  • Insurance Business
  • Investment Fund Management Business
  • Lease-Finance Business
  • Shipping Business
  • Headquarters Business
  • Intellectual Property Business
  • Holding Company Business
  • Distribution & Service Centre Business

 

 

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