Transfer Pricing: Essential UAE Corporate Tax Compliance for Success

REAL ESTATE1 month ago

Transfer Pricing: The introduction of the federal Corporate Tax (CT) in the United Arab Emirates has heralded a new era of fiscal responsibility and regulatory alignment with international standards. A critical component of this new tax landscape is the robust framework for Transfer Pricing (TP), designed to ensure that transactions between related parties are conducted on an arm’s length basis. For businesses operating in or with the UAE, understanding and meticulously complying with these TP rules is paramount to avoid penalties and ensure tax efficiency.

The Arm’s Length Principle: The Cornerstone of UAE TP

At the heart of the UAE’s transfer pricing regime is the Arm’s Length Principle (ALP), enshrined in Article 34 of the UAE CT Law. This principle dictates that transactions between “Related Parties” and “Connected Persons” must be conducted as if they were between independent, unrelated parties under comparable circumstances. The objective is to prevent the artificial shifting of profits across jurisdictions to minimize tax liabilities.

The UAE’s TP rules are largely aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines), which are widely accepted international standards. This alignment provides a familiar framework for multinational corporations already adhering to OECD principles.

The UAE CT Law provides clear definitions for “Related Parties” (Article 35) and “Connected Persons” (Article 36), broadening the scope of transactions subject to TP scrutiny.

Related Parties generally include:
- Two or more natural persons related up to the fourth degree of kinship.
- A natural person and a legal entity where the natural person (alone or with related parties) directly or indirectly owns or controls 50% or more of the entity.
- Two or more legal entities where one entity (alone or with related parties) directly or indirectly owns or controls 50% or more of the other, or where a third party (alone or with related parties) directly or indirectly owns or controls 50% or more of both entities.
- A person and its Permanent Establishment (PE) or foreign PE.
- Partners in the same unincorporated partnership.
- Trustee, founder, settlor, or beneficiary of a trust or foundation, and their related parties. “Control” is broadly defined to include the ability to exercise 50% or more voting rights, determine the composition of 50% or more of the board of directors, or be entitled to 50% or more of the profits or net assets, or significantly influence the conduct of a business.
Connected Persons primarily refer to:
- An owner of the Taxable Person.
- A director or officer of the Taxable Person (Key Managerial Personnel – KMP).
- Related parties of the above individuals. Payments or benefits provided to Connected Persons are generally deductible only if they correspond to the market value and are incurred wholly and exclusively for business purposes.

Crucially, the UAE TP rules apply to both cross-border and domestic transactions between related parties and connected persons, including those involving Free Zone entities. This is a significant aspect, as many local groups in the UAE were historically structured without considering inter-company charges or formal agreements, a practice that now requires immediate review.

Accepted Transfer Pricing Methods

To determine the arm’s length nature of transactions, the UAE CT Law and the FTA’s Transfer Pricing Guide (issued October 2023) prescribe five widely recognized methods, consistent with OECD guidelines:

Comparable Uncontrolled Price (CUP) Method: Compares the price charged in a controlled transaction to the price charged in a comparable uncontrolled transaction.
Resale Price Method (RPM): Examines the gross margin realized by a reseller in a controlled transaction by reference to the gross margin realized in comparable uncontrolled transactions.
Cost Plus Method (CPM): Compares the gross profit markup on costs incurred by a supplier in a controlled transaction to the gross profit markup in comparable uncontrolled transactions.
Transactional Net Margin Method (TNMM): Examines the net profit margin realized by a taxpayer from a controlled transaction by reference to the net profit margin realized by comparable uncontrolled transactions.
Transactional Profit Split Method (PSM): Divides the combined profits of related parties from a controlled transaction based on their relative contributions.

The law does not prescribe a strict hierarchy of methods; rather, businesses should select the “most appropriate method” based on a thorough functional analysis, considering the facts and circumstances of the transaction, the characteristics of the property or services, economic circumstances, and business strategies. The FTA generally prefers using the interquartile range from benchmarking studies rather than the full range.

Transfer Pricing Documentation Requirements

The UAE has introduced clear requirements for maintaining transfer pricing documentation, aligned with OECD BEPS Action 13 (Master File and Local File) and a specific Disclosure Form for Related Parties and Connected Persons.

Transfer Pricing Disclosure Form: This form must be submitted as part of the annual Corporate Tax Return. It requires aggregated information on related party transactions, including gross transaction values, the TP method used, and the arm’s length value, with any difference automatically reported as an adjustment. This form is mandatory for taxpayers with an aggregate value of Related Party transactions amounting to AED 40 million or more in the relevant tax period, or if individual transaction categories (e.g., goods, services, interest) exceed AED 4 million each. Disclosure is also required for payments or benefits to Connected Persons exceeding AED 500,000.
Master File and Local File: These comprehensive documents provide detailed information about a multinational group’s global operations and the specific related party transactions within a jurisdiction.
- Master File: Required if the Taxable Person is part of an MNE group with total consolidated group revenue of AED 3.15 billion (EUR 750 million) or more. It provides a high-level overview of the MNE group’s global business, organizational structure, and overall transfer pricing policies.
- Local File: Required if the Taxable Person’s revenue for the relevant tax period is AED 200 million or more, or if they are part of an MNE group meeting the AED 3.15 billion threshold. It provides detailed information on specific controlled transactions entered into by the local entity, including a functional analysis, industry and economic analysis, and benchmarking studies to demonstrate arm’s length compliance.
Both the Master File and Local File must be prepared contemporaneously (i.e., at the time the transactions are undertaken or by the time the tax return is submitted) and must be submitted to the FTA within 30 days of a request. Note: Exempt entities and those qualifying for Small Business Relief are generally not required to maintain a Master File or Local File, though they must still adhere to the ALP for related party transactions.

Challenges and Strategic Imperatives for Businesses

The new TP rules present several challenges and strategic imperatives for businesses in the UAE:

Data Collection and Granularity: Gathering the necessary financial and operational data for functional analysis and benchmarking, especially for historical transactions, can be a significant undertaking. Many businesses, particularly local groups, may lack the systems for this level of detail.
Benchmarking Studies: Conducting robust benchmarking studies to support arm’s length pricing requires access to reliable commercial databases and expertise in applying appropriate methodologies.
Domestic Transactions: The application of ALP to domestic related party transactions is a new concept for many UAE businesses. This requires formalizing intercompany agreements and internal charging mechanisms where none existed previously.
Free Zone Entities: While qualifying Free Zone entities may benefit from a 0% corporate tax rate on “Qualifying Income,” they are still subject to TP rules for their related party and connected person transactions. This ensures that profits are not artificially shifted into the Free Zones.
Pillar Two Interaction: For large MNEs, the UAE’s implementation of the Domestic Minimum Top-Up Tax (DMTT) under the OECD’s Pillar Two rules from January 1, 2025, adds another layer of complexity. Transfer pricing adjustments will directly impact the effective tax rate calculation for Pillar Two purposes, making accurate TP more crucial than ever.
Penalties: Non-compliance with TP rules, including failure to submit documentation or incorrect application of ALP, can result in significant penalties ranging from AED 10,000 to AED 100,000.

To navigate this complex landscape, businesses should:

Identify All Related Parties and Connected Persons: Map out all relationships and intercompany transactions within the group, both domestic and international.
Conduct a Robust Functional Analysis: Understand the functions performed, assets utilized, and risks assumed by each entity involved in related party transactions.
Review Existing Intercompany Agreements: Ensure all agreements are legally binding, reflect commercial reality, and are consistent with the ALP. Formalize informal arrangements where necessary.
Perform Benchmarking Studies: Conduct or commission studies to justify pricing for all material related party transactions.
Prepare and Maintain Documentation: Proactively prepare the Transfer Pricing Disclosure Form, Master File, and Local File as required, ensuring they are readily available.
Implement Robust Internal Controls: Establish clear policies and procedures for managing and documenting related party transactions to ensure ongoing compliance.
Seek Expert Advice: Engage with experienced tax and transfer pricing advisors to assess risks, develop appropriate policies, and ensure compliance with the evolving regulations.

The UAE’s commitment to international tax standards through its corporate tax and transfer pricing rules signifies a mature and transparent fiscal environment. For businesses, embracing these changes through proactive planning and rigorous compliance is essential for mitigating risks, optimizing tax positions, and fostering sustainable growth in the dynamic UAE market.

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