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3rd Port Shipment in UAE

3rd Port Shipment is a supply chain the executive’s technique where the business does not keep merchandise in stock yet rather moves its client’s requests and shipment subtleties to either the manufacturer, another retailer, or a distributer, who at that point sends the products directly to the customer. As in business, most of retailers have their profit on the difference between the wholesale and retail price. There are different names utilized for such exchange model “Drop Shipment” “Foreign-to-Foreign shipment”, “Triangle Shipment” and so on.

What are the advantages of third Port Shipment?

Considering third Port Shipment is overseen by a UAE company or distributor:

  • it decreases supply chain costs;
  • decline travel time or transportation time from the nation of origin to nation of destination;
  • Optimize the supply chain while managing one substance

Imagine a scenario in which UAE organization is the related entity of manufacturer/supplier; will this draw in Economic Substance Regulation?

In Cabinet of Ministers Resolution No. 31 of 2019[1] Concerning Economic Substance Regulation, gives definition to “Distribution and Service Centre Business as below”:

“Distribution and Service Centre Business: any of the following businesses:

  • Purchasing from a Foreign Connected Person and importing and storing in the State: component parts or materials for goods; or goods ready for sale, and reselling such component parts, materials or goods outside the State. 
  • Providing services to Foreign Connected Persons in connection with a business outside the State.”

According to definition, “3rd Port Shipment” may not be pulled to the point (a) since “storing in the state” isn’t fulfilled.

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In The UAE Economic Substance Regulations Relevant Activities Guide[2], under Section 3.9. Distribution and Service Centre Business

A “Distribution and Service Centre” Business alludes to two distinct activities that are secured under one” Relevant Activity” heading.

A Licensee is viewed as occupied with 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.

A Licensee is viewed as occupied with an “Service Centre Business” on the off chance that it gives 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 only purchase goods from or distribute goods to third parties are not viewed as occupied with a Distribution Business. In like manner, Licensees that are occupied with the matter of offering types of services to third parties are not considered as carrying on a “Service Centre Business”.

But, According to Activity Guide, there is no reference to the point related toward “storing in the state “, and subsequent purchases of goods from a foreign related party, and forward distribution gets secured. It further gets expounded that the “Licensees that only purchase goods from third parties are not considered engaged in a Distribution Business”.

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Now, will a guide override the Cabinet of Ministers Resolution?

Article 6 of the “resolution“, states that:

“6. the Competent Authority shall issue guidance on how the Economic Substance Test may be met, including without prejudice to the generality of the foregoing, any expression used in this Article for the purpose of that test, including the meaning of “adequate”. 

7. Regard must be had to any guidance under Clause 6 of this Article concerning the interpretation of any expression. 

8. The Competent Authority may revise guidance issued under Clause 6 of this Article from time to time and a reference to guidance includes a reference to revised guidance.” 

Thus, According to aim of the law and primary read, activity performed under the “3rd Port Shipment” might be ordered under the head Distribution and Service Centre Business.

Model embraced by entity situated in UAE might be visualized as of offering types of assistance for the foreign related party for example offering types of assistance to Foreign Connected Persons regarding the business outside the state, by encouraging:

  1. Order booking.
  2. Stock/merchandise movement management, and so forth.
  3. Managing the payment.
  4. Administrative procedures of invoicing/BL/and so on.

There might be further guidance note’s, regarding the matter from the competent authorities. Till time these are clarified, we have to guarantee that the intent of the regulation is additionally perused with the verbatim.

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[1] Cabinet of Ministers Resolution no. 31 of 2019 Concerning economic substance regulation, United Arab Emirates Ministry of Finance, https://www.mof.gov.ae/en/lawsandpolitics/cabinetresolutions/pages/312019.aspx#:~:text=31%20of%202019%20concerning%20economic%20substance%20regulations,-H.H.%20Sheikh%20Mohammed&text=Articles%204%20and%205%20from,core%20income%2Dgenerating%20activities%E2%80%9D.

[2] The UAE Economic Substance Regulations Relevant Activities Guide,  United Arab Emirates Ministry of Finance, https://www.mof.gov.ae/ar/StrategicPartnerships/Documents/Relevant%2BActivities%2BGuide%2B_April%2B2020.pdf


Cite this article (The Bluebook 20th ed.)-

Hariharan V, 3rd Port Shipment in UAE, Ex Gratia Law Journal, (August 24, 2020), https://exgratialawjournal.in/blawg/international-law/laws-of-other-countries/3rd-port-shipment-in-uae/.

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