As the UAE’s new Corporate Tax regime progresses and most companies move in Q4 of their first tax period, businesses must focus on various compliance areas, one of which is managing transactions with related parties and connected persons. Often, companies transfer goods or services within their group, and such transactions are governed by Transfer Pricing rules under Federal Decree-Law No. 47 of 2022. This article delves into Transfer Pricing regulations under the UAE Corporate Tax Law and their implications for businesses.

1. What is Transfer Pricing?

Transfer pricing refers to the process of setting prices for goods or services exchanged between related parties, such as group companies. For example, if one company within a group sells raw materials to another, the price of those materials must be established at fair market value. The key aim of transfer pricing is to ensure that profits are appropriately allocated among group entities while adhering to local tax laws.

The foundation of transfer pricing is the arm’s length principle, which requires that prices charged under related party transactions mirror those charged to unrelated, independent parties in similar circumstances. In essence, prices must reflect open-market conditions. Article 34 of the UAE Corporate Tax Law provides detailed guidelines on transfer pricing and the arm’s length principle. 

2. Scope of UAE Transfer Pricing Rules:

• All agreements or transactions between Related Parties or Connected Persons fall under the transfer pricing regulations in the UAE. These transactions must adhere to the arm’s length principle in controlled transactions.
• Even exempt entities, those opting for small business relief, and standalone entities without Related Party transactions are subject to the overarching transfer pricing rules. However, they are not required to prepare or maintain Transfer Pricing documentation.
• For entities claiming Free Zone tax holiday, adherence to the arm’s length principle and maintenance of robust transfer pricing documentation is a pre-requisite for availing the zero percent corporate tax rate.

3. Transfer Pricing Documentation to be maintained in UAE:

Transfer Pricing Documentation refers to a set of documents prepared by Taxable Persons to demonstrate their compliance with the arm’s length principle in their transactions with Related Parties. The purpose of this documentation is to give the UAE Federal Tax Authority (UAE FTA) a clear understanding of how the transfer pricing rules are applied by the Taxable Person and to assess whether the outcomes of these transactions align with the arm’s length principle for each relevant tax period.

For certain Taxable Persons (who meet the thresholds prescribed in the Ministerial Decision No. 97 of 2023), UAE law outlines five key requirements regarding transfer pricing documentation, which must be completed for each tax period:

• Master File: This document provides a high-level overview of the multinational group’s business operations, revenue distribution, and economic activity. 
• Local File: This contains detailed information on the operations of the local entity and analyses its related party transactions to ensure compliance with the arm’s length principle. 
• Transfer Pricing Disclosure Form: This includes details of all related party transaction and transactions with connected persons conducted during a tax period. This form needs to be filed by all UAE Taxpayers – no threshold prescribed for this.
• Country-by-Country Report: As specified in Cabinet Resolution No. 44 of 2020, this report summarizes the quantitative data of a UAE headquartered multinational group with consolidated revenue exceeding AED 3.15 billion.
• Additional Supporting Information: Upon request, the FTA may require further supporting information under Article 55(4) of the Corporate Tax Law.

4. Role of the UAE FTA in Transfer Pricing

• The Local File, Master File, and other supporting documents (e.g., agreements, invoices, price calculations) must be provided to the UAE FTA within 30 days upon request.
• The application of the transfer pricing principles should yield a range of acceptable financial outcomes consistent with transactions between unrelated parties. If the result of a transaction falls outside the arm’s length range, the UAE FTA is empowered to adjust the taxable income to align it with the arm’s length standard. These adjustments must be fair, accurate, and reflect the realities of the transaction.
• If the UAE FTA determines that a related party transaction lacks commercial substance or is undertaken solely for tax avoidance, it may disregard the transaction, impute income, and levy taxes, interest, and penalties.

5. Conclusion

Transfer pricing plays a critical role in ensuring that companies fairly allocate profits and comply with tax regulations. In the UAE, adhering to transfer pricing rules under the Corporate Tax Law is essential for maintaining transparency and equity in tax matters. Businesses should approach transfer pricing with careful planning and robust documentation to avoid legal and financial risks. While the rules under UAE Corporate Tax Law are clear, applying them can be complex. 

We encourage businesses—whether new or established—to consult with professionals to ensure compliance in transactions with related parties. Contact us for expert assistance with your tax matters.

Article By Neha Malhotra