UAE (ESR) - Will you consider purchase of SERVICE from FCP as Relevant Activity, for Distribution and Service Centre Business ?

Since there is no definition of "service" provided (in the Economic Substance Regulations), we need to look around and search the meaning of service. There are two definitions or explanations, which got my attention.

Source: Google “the action of helping or doing work for someone.”

Second definition from Wikipedia, i.e. for “Trade in service”

Source: https://en.wikipedia.org/wiki/Trade_in_services & https://www.wto.org/english/thewto_e/20y_e/services_brochure2015_e.pdf

Trade in Services refers to the sale and delivery of an intangible product, called a service, between a producer and consumer. Trade in services that takes place between a producer and consumer that are, in legal terms, based in different countries is called International Trade in Services.

(Mode 1) Cross-Border Trade - covers services supplied from one country to another. 

(Mode 2) Consumption Abroad - covers consumers or firms making use of a service in another country. 

(Mode 3) Commercial Presence - covers a foreign company setting up subsidiaries or branches to provide services in another country. 

(Mode 4) Presence of Natural Persons - covers individuals traveling from their own country to supply services in another. 

Comments:

As per above definition and interpretation, where SERVICE is purchased from FCP (Foreign Connected Person) and are sold to third party outside UAE, may constitute to be conducting a “Relevant Activity”.

Reference drawn from: 

(a)   In the general cases, entity in state may be in business of providing services to the FCP for onward sales.

(b)  As per “Trade in Service”, these types of service are covered under (Mode 3) i.e. Commercial Presence. These services may be constituted in connection with the FCP business outside the UAE.

(c)   BEPS Action Point 5, where income parked in the state and may constitute to be part of “Harmful tax practices”.

Note: 

(a)   Above interpretation may not cover, Intellectual Property (IP) Business, for the same reference should be drawn from IP Business as specified in the ESR & Guide.

(b)  In these cases, value addition, substance and contracts/ agreements should be analyzed. Example, in case state entity is importing one of activity from FCP, may not constitute to be classified as Relevant Activity.

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Additional reference i.e. extract from ESR & Guide

Cabinet of Ministers Resolution No. 31 of 2019 concerning ESR.

Service Centre Business: any of the following businesses: 

(b) providing services to Foreign Connected Persons in connection with a business outside the State. 

The UAE Economic Substance Regulations Relevant Activities Guide 

3.9 Distribution and Service Centre Business 

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. 

Licensees that are engaged in the business of providing services to third parties are not considered as carrying on a “Service Centre Business”.

Note: This information is based on my personal interpretation, from references used. This content is for informational & knowledge sharing purposes only, and is not intended to provide, and should not be relied on for compliance, tax or accounting advice.