Introduction to Transfer Pricing in the UAE

Transfer Pricing (TP) refers to the approach and methodologies used to determine the prices charged between related entities under common ownership or control for transactions involving goods, services, and intangibles. The goal is to ensure these transactions are priced according to market standards—specifically, that they comply with the arm’s length principle.

1. Brief History and Context of Transfer Pricing Regulations in the UAE

The United Arab Emirates (UAE) government introduced comprehensive corporate tax laws with the enactment of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. The laws became effective from June 1st 2023 and these laws also introduced transfer pricing rules that adopts Organization for Economic Cooperation and Development’s (OECD) approach and in-line with the three tier approach under Base Erosion and Profit Shifting (BEPS) Action Plan 13. The UAE’s corporate tax rates varies between 0%, 9% or 15% on taxable income. The regulations of Transfer Pricing in UAE are introduced as one of the measures to promote transparency and combat against tax base erosion or profit shifting.

In order to avoid the disputes and penalties from the Federal Tax Authority (FTA), the companies registered and operating in the UAE, while for those engaging in cross-border or intra-group transactions are required to comply with the rules of Transfer Pricing in the UAE.

2. Key Concepts: Arm’s Length Principle, Related Party Transactions, and Comparability

a) Arm’s Length Principle:

The arm’s length principle requires that transactions between related parties or entities within the group must be conducted as though they were between two unrelated third parties functioning in the open market. In other words, the pricing should reflect market conditions and should not be artificially manipulated to minimize tax liabilities.

b) Related Party Transactions:

Under the UAE’s transfer pricing framework, related party transactions include transactions between entities that share common ownership or control (reference made to 50% or more ownership, voting power or interest). This can include parent company, subsidiary and affiliated companies, and/or persons holding significant interest in the business. The scope of related-party transactions is wide to all arrangements and transactions between related parties, which may include:

• Sale or purchase of goods
• Provision or receipt of services
• Royalties and intellectual property exploitation (Trademark, Tradename, right to use, etc.
• Financing arrangements (loans, cash pooling, guarantees, etc.)

c) Comparability analysis:

A comparability analysis is performed to determine whether the transactions between related parties meet the arm’s length principle. This normally includes comparison of terms of transactions that occur between unrelated parties. There are five factors to consider while performing the comparability analysis:

• The nature of the transaction
• The functions performed by each party
• The risks and assets involved in the transaction
• The contractual terms of the transaction
• The economic conditions of the market

On 23 October 2023, the FTA released the Transfer Pricing Guide (TP Guide), offering detailed insights and practical advice for taxpayers on complying with relgulations of Transfer Pricing in the UAE under the UAE Corporate Tax Law. The TP Guide closely aligns with the Transfer Pricing Guidelines issued by the OECD (OECD Guidelines) and provides comprehensive guidance on the UAE’s TP framework. It includes practical examples, such as identifying Related Parties and Connected Persons, conducting a functional analysis, and determining the pricing of intra-group financing transactions.

3. Importance of Transfer Pricing for Businesses Operating in Free Zones and Mainland UAE

a) Transfer Pricing in the Free Zones:

Traditionally, companies in the free zones have enjoyed tax benefits. However, many of these companies engage in related-party transactions amongst their group entities within UAE or outside UAE, such companies fall in the purview of the transfer pricing rules. Especially, if a company is enjoying zero percent (0%) corporate tax within the free zone, it has to ensure that its domestic and cross-border related-party transactions comply with the arm’s length principle to avoid disputes with tax authorities.

b) Transfer Pricing in the Mainland UAE:

The introduction of corporate tax has made the transfer pricing in the UAE, a compliance mandatory for businesses operating in mainland UAE, especially if they are part of multinational groups or engaged in related-party transactions. Therefore, such entities must prepare transfer pricing documentation to support compliance with the arm’s length principle for their related-party transactions.
In both free zones and mainland, failure to comply with the rules of transfer pricing in the UAE could lead to tax adjustments and penalties. Companies must also be prepared for transfer pricing audits by the FTA, ensuring they maintain proper documentation to support the arm’s length nature of their related-party transactions.

4. Conclusion

Transfer pricing in the UAE is a key pillar of the UAE’s corporate tax framework, ensuring that related-party transactions are aligned with market standards through the arm’s length test.

Compliance with these regulations is essential to avoid tax disputes and penalties, particularly as the FTA increases its scrutiny of related-party transactions overtime. If you’re concerned about the TP rules, benchmarking, Local File, Master File. Please don’t hesitate to contact us.

Our experts for Transfer Pricing in the UAE, who brings +10 years of experience in niche TP industries with MNE across the region, can bring your compliance to the next level and help you plan for an impact on the business, we rely on global accredited database for conducting our work (e.g., TP Catalyst/Bureau Van Dijk).

For expert guidance on Transfer Pricing in the UAE and to ensure compliance with the latest Corporate Tax regulations in the UAE, or to schedule a free consultation, reach out to us at:

Call/WhatsApp: +971 58 825 7795
Email: contact@alliance-acc.com

References:

1. Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
2. Ministerial Decision No. 97 of 2023 on Transfer Pricing Documentation Requirements
3. UAE Transfer Pricing Guide
4. OECD Transfer Pricing Guidelines