UAE Corporate Tax Transfer Pricing Guide

What is Transfer Pricing in UAE?

Transfer Pricing in the UAE refers to the pricing of transactions between related companies or connected persons within the same business group. Under the UAE Corporate Tax law, these transactions must follow the Arm’s Length Principle, meaning the price should be the same as the price that would be charged between independent businesses in the open market. If a company in a UAE Free Zone sells products to its related mainland company, the price charged must be similar to the market price that would be charged to an unrelated customer. This ensures that profits are not artificially shifted between related businesses to reduce tax.

Transfer pricing in the UAE applies to any transaction between related parties or connected persons - ensuring such transactions are priced on an arm’s-length basis. However, detailed documentation (Master File and Local File) is required only if the taxpayer exceeds defined revenue thresholds; smaller entities must still ensure transactions meet ALP and retain sufficient records to support pricing, if requested. The terms and conditions of these transactions are influenced by the relationship between the parties involved. In contrast to independent parties, who determine prices through market forces, related parties can establish prices that may not accurately represent the true market value. This can consequently impact the reported profits across various jurisdictions. To prevent the exploitation of tax liabilities through such non-arm's length pricing, the Arm’s Length Principle is applied, which necessitates that transactions between Related Parties be conducted at a fair market value, comparable to those between independent parties. UAE Corporate Tax Services play a vital role in ensuring compliance with these principles, helping businesses structure related-party transactions correctly and avoid potential tax penalties. The UAE Corporate Tax Transfer Pricing Guide provides businesses with essential insights into applying these rules effectively.

Corporate tax transfer pricing refers to the practice of setting prices for transactions between related entities within a multinational corporation. This ensures that goods, services, and intellectual property are exchanged at market rates, complying with the arm's length principle. Proper transfer pricing is crucial for accurate profit allocation across different tax jurisdictions, preventing tax evasion and ensuring fair taxation. Regulations and documentation requirements help maintain transparency and compliance with international and local tax laws. Dubai Corporate Tax Registration Services assist businesses in aligning with these requirements, offering expert guidance on proper documentation and compliance with transfer pricing regulations in the UAE. The UAE Corporate Tax Transfer Pricing Guide serves as a valuable resource for understanding and applying these rules effectively.

Scope of the Transfer Pricing Rules in the UAE

The UAE Transfer Pricing (TP) rules apply to transactions and arrangements between Related Parties or Connected Persons under the UAE Corporate Tax framework. These rules ensure that such transactions are conducted according to the Arm’s Length Principle, meaning that the pricing must reflect what independent parties would agree to in comparable circumstances.
Transfer Pricing rules apply to both domestic and cross-border transactions, ensuring fairness and preventing profit shifting within related entities.
Even entities that qualify for Small Business Relief, exempt entities, or standalone businesses with no related-party transactions must comply with the Arm’s Length Principle when Controlled Transactions exist. However, these entities may not be required to prepare detailed Transfer Pricing documentation.

Related Parties and Connected Persons

Transfer Pricing provisions primarily apply when transactions occur between Related Parties or Connected Persons, as defined under the UAE Corporate Tax Law.

Related Parties

A Related Party refers to individuals or entities that have a pre-existing relationship through:

• Kinship or family relationships
• Ownership
• Control or influence over business decisions

This relationship can exist regardless of whether the parties are located inside or outside the UAE.
1. Kinship or Affiliation

Individuals are considered related if they are connected up to the fourth degree of kinship or affiliation. This includes relationships established through blood relations, marriage, adoption, or guardianship.
Examples include:

• First Degree : Parents and children, and their spouses’ parents and children
• Second Degree : Grandparents, grandchildren, and siblings
• Third Degree : Great-grandparents, great-grandchildren, uncles, aunts, nieces, and nephews
• Fourth Degree : Great-great-grandparents, first cousins, grand uncles, grand aunts, grand nieces, and grand nephews

These relationships are considered when determining whether transactions fall under Transfer Pricing rules.

2. Ownership Relationships

Entities may also be considered Related Parties through ownership structures.
A relationship exists when:

• A natural person, alone or together with their Related Parties, owns 50% or more of a company.
• A company directly or indirectly owns 50% or more of another company.
• A single person or group of related persons owns 50% or more in two or more entities.

Such ownership structures commonly occur within parent-subsidiary or group company arrangements.

3. Control or Significant Influence

Parties may also be considered related when one person has direct or indirect control over another entity.
Control may exist when a person:

• Holds 50% or more of voting rights
• Can appoint 50% or more of the board of directors
• Is entitled to 50% or more of the profits
• Exercises significant influence over the business decisions or operations

Control does not always require ownership and may arise through management authority or contractual arrangements.

Additional Related Party Relationships

Transfer Pricing rules also apply to the following relationships:

• A person and its Permanent Establishment (PE) or Foreign PE
• Partners within the same unincorporated partnership
• Relationships involving trusts or foundations, including trustees, founders, settlers, or beneficiaries

Connected Persons

A Connected Person refers to individuals who are closely associated with a business and may receive payments or benefits from it.
Examples include:

• An individual who owns or controls the business
• Directors or officers of the company
• Partners in an unincorporated partnership
• Related parties of the above individuals

Payments or benefits provided to Connected Persons are deductible for Corporate Tax purposes only if they meet the Arm’s Length Principle and are incurred wholly and exclusively for business purposes.

However, this restriction may not apply in certain cases, such as when:

• The company is listed on a recognized stock exchange
• The business is regulated by a competent authority in the UAE
• Other categories specified by the UAE Cabinet

International Agreements and Transfer Pricing

The UAE’s Transfer Pricing framework is supported by both domestic legislation and international tax agreements.
The primary legal basis is found in Articles 34 to 36 of the UAE Corporate Tax Law, which incorporate the Arm’s Length Principle.
Additionally, the UAE has an extensive Double Taxation Avoidance Agreement (DTAA) network, which refers to Associated Enterprises as defined in the OECD Model Tax Convention.
If there is any difference between UAE Transfer Pricing rules and an applicable international tax treaty, the provisions of the international agreement will prevail.

Controlled Transactions

A Controlled Transaction refers to any transaction or arrangement between Related Parties or Connected Persons.
These transactions typically include:

• Supply or transfer of tangible goods
• Provision of services
• Loans and financial arrangements
• Licensing or transfer of intellectual property
• Use or exploitation of intangible assets such as patents, trademarks, and know-how

Controlled Transactions may be:

• Cross-border transactions (between entities in different countries)
• Domestic transactions (between related parties within the UAE, including Free Zone entities)

All Controlled Transactions must comply with the Arm’s Length Principle, ensuring that the pricing reflects fair market conditions.

How Transfer Pricing Works in UAE?

Corporate tax transfer pricing is a method used by companies to set prices for goods, services, or intellectual property exchanged between divisions within the same company or between related entities under common control. The main objective is to ensure that transactions reflect market conditions as if they were conducted between unrelated parties, adhering to the "arm's length principle."

Here’s how transfer pricing works:

• Determination of Transfer Prices: Companies establish transfer prices using various methodologies such as the Comparable Uncontrolled Price (CUP) method, Cost Plus Method, Resale Price method, Transactional Net Margin Method (TNMM), and the Profit Split method. These methodologies aim to replicate the pricing that would occur between independent enterprises.
• Documentation and Compliance: Firms must document their transfer pricing practices and provide justification for the chosen methods. This documentation is crucial for compliance with international and local tax regulations and for defending against audits by tax authorities.
• Tax Implications: Transfer pricing affects the allocation of income and expenses among different jurisdictions, impacting the overall tax liability of multinational companies. By setting appropriate transfer prices, companies can manage their tax exposure while complying with regulatory requirements.
• Regular Review and Adjustment: Due to changes in market conditions, regulatory updates, and business operations, companies need to regularly review and adjust their transfer pricing policy to remain compliant and competitive.
   

Transfer pricing is essential for effective tax planning, performance measurement, and regulatory compliance within multinational corporations.
 

Key points in the UAE Transfer Pricing Guide

Burden of Proof

In the UAE, it’s up to you, the taxpayer, to prove that your transfer prices align with what unrelated parties would charge. This means you’ll need to keep solid records to back up your pricing strategies and show that your transactions with related companies are fair.

Transfer Pricing Documentation

The UAE requires a Master File and Local File only for taxpayers whose UAE revenue in the relevant tax period reaches AED 200 million or more, or for entities that are part of a multinational group with consolidated global revenue of at least AED 3.15 billion. For eligible MNE groups, a CbCR (Country-by-Country Reporting) must also be maintained.

Transfer Pricing Disclosure Form

When filing your corporate tax return, the UAE’s Federal Tax Authority (FTA) asks for a TP Disclosure Form. This form includes:

• Information on transactions with related parties
• The pricing methods you used
• Comparisons with other transactions to show fair pricing
   

Arm’s Length Principle & Application

Arm’s Length Principle

The Arm’s Length Principle, set forth in Article 34 of the UAE Corporate Tax Law, requires transactions and agreements involving Related Parties or Connected Persons to be priced as if they were conducted between independent parties under similar conditions. This principle guarantees that the pricing of these transactions accurately represents what two unrelated entities would have agreed upon, taking into account the available conditions and evidence.

The Arm's Length Principle applies regardless of whether there is a formal pricing arrangement or legal agreement among Related Parties. This means that if a property is transferred or a service is provided without proper remuneration or below market value, the transaction needs to be carefully assessed to determine if it had taken place between independent parties and at what price.

The principle considers Related Parties and Connected Persons, such as members of a corporate group, as independent entities. This approach emphasizes evaluating whether the conditions of Controlled Transactions differ from those observed in Comparable Uncontrolled Transactions. This comparison, referred to as a "comparability analysis," is essential in the application of the Arm's Length Principle.
 

Application of the Arm’s Length Principle

This section outlines the three essential stages of implementing the Arm's Length Principle for Controlled Transactions: 

Step 1: Identify Related Parties, Connected Persons, Relevant Transactions, and Perform a Comparability Analysis

Identify Related Parties and Connected Persons:

• Related Parties: Entities that exert control over one another or are under common control, encompassing parent companies, subsidiaries, and affiliates.
• Connected Persons: Individuals or entities with substantial control over the business, such as major shareholders, directors, or family members of key personnel.
   

Identify Relevant Transactions and Arrangements:

• Transactions: Any monetary transactions occurring between parties with a close relationship, encompassing sales, services, loans, and leases.
• Arrangements: Contracts or arrangements, whether formal or informal, that affect the terms and conditions of transactions.
   

Perform a Comparability Analysis:

• Functional Analysis: Examine the functions performed, assets used, and risks assumed by each party in the transaction.
• Economic Analysis: Assess the economic conditions, market conditions, and business strategies that influence the transaction.
• Comparability Factors: Consider factors such as the characteristics of the goods or services, contractual terms, economic circumstances, and business strategies.
   

Step 2: Selection of the Most Appropriate Transfer Pricing Method

• 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: Determines the arm’s length price by subtracting an appropriate gross margin from the resale price of a product sold to an independent party.
• Cost Plus Method: Adds an appropriate markup to the costs incurred by the supplier in a controlled transaction to determine the arm’s length price.
• Transactional Net Margin Method (TNMM): Examines the net profit margin relative to an appropriate base (e.g., costs, sales) that a taxpayer realizes from a controlled transaction.
• Profit Split Method: Divides the combined profits from controlled transactions among the related parties based on their relative contributions.
   

Step 3: Determination of the Arm’s Length Price

• Gather Data: Collect data on comparable uncontrolled transactions, including internal and external comparables.
• Adjustments: Make necessary adjustments to account for differences between the controlled and uncontrolled transactions to ensure comparability.
• Calculate the Arm’s Length Range:  Determine a range of acceptable prices or profit margins that reflect what independent entities would have agreed upon under similar circumstances.
• Select the Arm’s Length Price: Choose the most appropriate point within the arm’s length range, often the median or mean, to set the transfer price.
• Documentation: Maintain thorough documentation to support the transfer pricing analysis and the determination of the arm’s length price. This includes details of the comparability analysis, selection of the transfer pricing method, and any adjustments made.
   

Transactions with Related Parties and Connected Persons under the UAE Corporate Tax Law

Related Parties and Control under Transfer Pricing in UAE

Related Parties in the context of UAE Corporate Tax Law refer to entities or individuals that have the ability to directly or indirectly influence each other's business decisions. This influence often stems from control, ownership, or significant involvement in each other's operations. Understanding the concept of Related Parties is crucial in determining the application of transfer pricing rules to ensure transactions are conducted at arm’s length prices.
 

Who is a Related Party?

In UAE Corporate Tax Law, a Related Party includes various scenarios:

• Two or more Natural Persons: Related if they share a familial or close personal relationship.
• Natural Person and Legal Person: Related if there is substantial ownership or control between them.
• Two or more Juridical Persons: Related if there is significant ownership or control between these entities, such as parent-subsidiary relationships.
• Two or more persons are partners in the same Unincorporated Partnership: Related if they jointly control the partnership's operations.
• A person and its PE (Permanent Establishment) or Foreign PE: Related if there is control or significant influence over the PE's operations.
• A person (founder, beneficiary, trustee, etc.), of the trust or foundation and its Relating Parties: Related if there is control or substantial influence over the trust or foundation and its beneficiaries or trustees.
   

Understanding these definitions is crucial for compliance with UAE Corporate Tax Law, ensuring fair taxation practices and preventing tax avoidance through improper transfer pricing practices.
 

Trusted Corporate Tax Advisor in UAE

Reyson Badger is a prominent firm providing complete corporate tax services in UAE. Their team of expert tax consultants specializes in UAE corporate tax transfer pricing methods, offering extensive knowledge and experience to assist businesses effectively. They excel in guiding clients through complex calculations and strategic tax planning, ensuring compliance and optimizing tax strategies.

For further inquiries or assistance regarding transfer pricing and other corporate tax matters, Reyson Badger's team of expert UAE Transfer Pricing Consultants stands ready to provide personalized advisory services customized to meet business needs.