Under UAE Corporate Tax law, the primary objective of transfer pricing regulations is to guarantee that transactions involving Related Parties adhere to the arm’s length principle, mirroring transactions conducted between independent entities. This prevents taxable income manipulation. UAE Corporate Tax law requires taxable entities to determine transactions with Related Parties and Connected Persons at their market value, which is why seeking expert guidance to implement transfer pricing rules correctly matters considerably.
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Do Transfer Pricing Rules Apply to Both Domestic and Cross-Border Transactions?
Transfer pricing rules apply to UAE businesses engaged in transactions with Related Parties and Connected Persons, regardless of whether those parties are situated within the UAE mainland, a free zone, or a foreign jurisdiction.
Who Is Considered a Related Party?
For an individual, Related Parties refer to relatives and companies in which the individual, alone or alongside their Related Parties, holds a substantial ownership interest, typically 50% or more of the company’s shares. For a company, Related Parties encompass other companies in which it, alone or in conjunction with its Related Parties, holds a controlling ownership interest, typically 50% or more of the shares, or those under predominant ownership exceeding 50%.
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Who Is Defined as a Connected Person?
Connected Persons are distinct from Related Parties. An individual is deemed connected to a business subject to UAE Corporate Tax if they:
- Are an owner of the business
- Hold a position as a director or officer within the business
- Are a Related Party of either of the above
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What Methods Are Available to Determine the Arm’s Length Value?
Taxable entities must apply one or more of the following methodologies to determine arm’s length values for transfer pricing purposes:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost-Plus Method
- Transactional Net Margin Method
- Transactional Profit Split Method
Worked Example: Applying the Cost-Plus Method
A UAE manufacturing subsidiary sells components to its related distribution entity in another jurisdiction. The subsidiary’s actual production cost per unit is AED 400. Using the Cost-Plus Method, the subsidiary identifies that independent manufacturers in comparable transactions typically apply a 20% markup over cost when selling to unrelated distributors. Applying that same markup, the arm’s length transfer price would be AED 480 per unit (AED 400 cost plus AED 80 markup). If the subsidiary had instead priced the transaction at AED 420 per unit, well below what an independent manufacturer would charge, this would understate the subsidiary’s UAE taxable profit relative to the arm’s length standard, exactly the kind of pricing the transfer pricing rules are designed to identify and correct.
Obligation to Maintain Transfer Pricing Documentation
Businesses in the UAE are required to maintain documentation concerning transactions with Related Parties and Connected Persons. Specific businesses are also mandated to submit this information alongside their Corporate Tax returns, and thresholds under Ministerial Decision No. 97 of 2023 determine when a Local File or Master File is specifically required.
Must Intra-Group Loan Arrangements Reflect Arm’s Length Treatment?
Transfer pricing rules extend to all transactions involving Related Parties and Connected Persons. Loans received from or provided to a Related Party or Connected Person must adhere to the arm’s length principle, covering factors like interest rates and loan duration, not just the principal amount involved.
Are Transfer Pricing Rules Applicable to Transactions Within a Tax Group?
Transactions among members of a Tax Group are consolidated in the group’s financial statements and are generally exempt from transfer pricing principles as a result. An exception arises where a Tax Group member needs to calculate and include its standalone taxable income, for example, to utilize Tax Losses acquired before joining the Tax Group or upon exiting it.
Frequently Asked Questions (FAQs)
Do UAE transfer pricing rules apply to domestic transactions between related UAE entities?
What ownership threshold generally defines a Related Party?
What methods can be used to determine an arm's length price?
Do transactions between members of the same Tax Group need to satisfy transfer pricing rules?
Must intra-group loans reflect arm's length terms?
What happens if a business doesn't maintain required transfer pricing documentation?
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
How Farahat & Co. Can Help
Farahat & Co., a trusted Tax Firm in UAE, helps businesses apply the correct transfer pricing methodology, maintain required documentation, and stay compliant with UAE Corporate Tax transfer pricing rules.
Contact Farahat & Co. today to discuss your transfer pricing compliance requirements.
