What are the Economic Substance Regulations (ESR)?
The Economic Substance Regulations (ESR) were introduced in the UAE in 2019 to ensure that businesses have a substantial economic presence in the country and are contributing to its economic development goals. The ESR applies to all businesses that carry out “relevant activities” in the UAE, including distribution and service center businesses.
The ESR requires businesses to demonstrate that they have a sufficient level of economic substance in the UAE, which means that they must have adequate employees, physical assets, and expenditure in the country. For distribution and service center businesses, the ESR requires them to have a significant amount of physical assets, such as warehouses, offices, and equipment, in the UAE. They must also have an appropriate number of employees who are qualified and have the necessary skills to carry out their job responsibilities.
Moreover, the ESR also mandates that distribution and service center businesses must carry out their core income-generating activities in the UAE, such as managing and storing goods, handling logistics, and providing after-sales services to customers. They must also have control over the relevant risks and have the ability to make decisions in the UAE. Contact Economic Substance Regulations team for more detail.
Compliance with Economic Substance Regulations (ESR) for Distribution & Service Centre Businesses
To comply with the ESR, distribution and service center businesses must submit an annual notification and economic substance declaration to the relevant authority, which is the Regulatory Authority (RA). The declaration must provide details of the business’s relevant activities, its economic substance in the UAE, and its compliance with the ESR.
Non-compliance with the ESR can result in significant penalties, including fines, suspension or revocation of licenses, and other sanctions. Therefore, it is essential for distribution and service center businesses to ensure that they have a sufficient level of economic substance in the UAE and are compliant with the ESR.
To ensure compliance, businesses should take the following steps:
Review their business activities: Distribution and service center businesses should review their activities to determine whether they are carrying out relevant activities in the UAE and whether they have a sufficient level of economic substance.
Identify and analyze relevant activities: Businesses should identify and analyze their relevant activities to determine whether they are carrying out core income-generating activities in the UAE.
Assess their economic substance: Businesses should assess their economic substance in the UAE, including physical assets, employees, and expenditure, to ensure that they meet the requirements of the ESR.
Submit annual notification and economic substance declaration: Businesses should submit an annual notification and economic substance declaration to the Regulatory Authority (RA) to demonstrate their compliance with the ESR.
Seek professional advice: Distribution and service center businesses should seek professional advice to ensure that they are compliant with the ESR and are taking advantage of the various incentives and benefits offered by the UAE government.
In addition to complying with the ESR, distribution and service center businesses can also benefit from the various incentives and benefits offered by the UAE government to encourage economic growth and development in the country. For example, the government offers tax exemptions and reduced rates to businesses operating in certain industries and sectors.
Furthermore, the UAE has a strategic location that offers easy access to global markets, making it an ideal location for distribution and service center businesses to expand their operations and reach new customers. The country also has a well-established transportation and logistics infrastructure, including world-class airports, seaports, and highways.