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With the introduction of corporate tax in the UAE, transfer pricing has become a critical consideration for businesses. Did you know that failing to comply with these regulations could lead to significant penalties and increased scrutiny from the Federal Tax Authority (FTA)?
The UAE’s transfer pricing framework aims to prevent tax avoidance tactics and ensure transactions among affiliated entities meet arm’s length standards. When you’re a multinational corporation, understanding these regulations is crucial to avoid penalties and maintain compliance.
Transfer Pricing rules in the UAE apply not only to MNE Groups but also to any transactions and arrangements with Related Parties or Connected Persons in domestic groups. All these transactions need to meet the arm’s length principle. In addition, transactions above the materiality threshold need to be disclosed in corporate tax returns.
Here, we will cover UAE transfer pricing regulations, key principles, documentation requirements, and compliance tips.
Transfer pricing refers to the pricing of transactions between related entities such as the parent company and its subsidiary etc and connected persons such as owner and the company. These apply to goods, services, intellectual property (IP), and financial arrangements and many more transactions.
The UAE has introduced transfer pricing regulations based on international best practices, including the OECD’s Base Erosion and Profit Shifting (BEPS) framework to prevent businesses from shifting profits to low-tax jurisdictions and ensure fair taxation.
Transfer pricing plays a vital role in the UAE’s evolving tax landscape, particularly as the country aligns with international tax frameworks. With the introduction of corporate tax and increased scrutiny from regulatory authorities, businesses must ensure their related party and connected person transactions comply with arm’s length principles. Proper transfer pricing policies help maintain tax compliance, prevent disputes, and support economic integrity.
Here’s why transfer pricing in UAE matters:
1. Prevent Tax Avoidance: Ensures businesses don’t shift profits to low-tax jurisdictions.
2. Promote Fair Taxation: Guarantees that profits are taxed where economic activities occur.
3. Enhance Transparency: Aligns with global tax standards, fostering stakeholder trust.
4. Ensure Compliance : Complying with law ensure robust compliance with UAE corporate tax regulations
Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses was issued in December 2022, which contains Article 34, Article 35, Article 36 and Article 55, which deal with Transfer pricing regulations in UAE. In May 2023, Ministerial Decision No. 97 was issued by UAE MoF for requirements for maintaining Transfer Pricing Documentation as defined in Article 55(2) of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. Now let’s discuss briefly what do TP regulations of UAE require.
Article 34 of the UAE Corporate Tax Law mandates that transactions between Related Parties adhere to the Arm’s Length Principle, ensuring they are priced as if conducted between independent entities under similar conditions. To determine compliance, businesses must apply recognized transfer pricing methods, including the Comparable Uncontrolled Price Method, Resale Price Method, Cost-Plus Method, Transactional Net Margin Method, and Transactional Profit Split Method. If none of these are suitable, an alternative method may be used, provided it aligns with arm’s length principles. The selection of an appropriate method depends on factors such as contractual terms, transaction characteristics, economic conditions, functions performed, assets employed, risks assumed, and business strategies. The Federal Tax Authority (FTA) is responsible for assessing whether the chosen transfer pricing method meets the required standard and may adjust Taxable Income if a transaction falls outside the acceptable arm’s length range. Any such adjustments must also be reflected in the taxable income of the Related Party involved in the transaction. Furthermore, if a foreign tax authority adjusts a transaction to meet the arm’s length standard, businesses in the UAE can apply for a corresponding adjustment to prevent double taxation. Given the introduction of corporate tax in the UAE, businesses must ensure that all intercompany transactions comply with transfer pricing regulations. Proper documentation and a well-structured transfer pricing policy are essential to mitigate risks, avoid disputes, and ensure compliance with UAE tax laws.
Article 35 of the UAE Corporate Tax Law defines Related Parties and the concept of Control, which are crucial for applying transfer pricing rules. Related Parties include individuals related by kinship (up to the fourth degree), adoption, or guardianship, as well as relationships between natural persons and juridical persons where the individual or their Related Parties own or control 50% or more of the entity. Additionally, two or more juridical persons are considered Related Parties if one owns or controls at least 50% of the other or if a common entity holds such ownership or control over both. The definition also extends to Permanent Establishments, partners in the same Unincorporated Partnership, and persons connected through trusts or foundations. The concept of Control refers to a person’s ability to influence another entity, including holding 50% or more of voting rights, board composition, profit entitlement, or significant decision-making power. This broad definition ensures that transactions between economically connected entities are subject to transfer pricing regulations, preventing profit shifting and ensuring fair taxation under UAE corporate tax law.
Article 36 of the UAE Corporate Tax Law regulates the deductibility of payments or benefits made to Connected Persons, ensuring they align with market value and genuine business purposes. A Connected Person includes owners, directors, officers, and their Related Parties, as well as partners in Unincorporated Partnerships and their Related Parties.
For a payment or benefit to be deductible, it must be at arm’s length, meaning it reflects the fair market value of the service or benefit provided and is incurred wholly and exclusively for business purposes. The arm’s length principle outlined in Article 34 applies in determining this. However, exceptions apply to publicly traded companies, entities under regulatory oversight, and other entities as designated by the Cabinet. This provision prevents profit shifting through excessive payments to connected entities while ensuring fair tax deductions for legitimate business transactions.
Article 55 of the UAE Corporate Tax Law outlines the transfer pricing documentation requirements for businesses engaged in transactions with Related Parties and Connected Persons. The Federal Tax Authority (FTA) requires businesses to submit a disclosure form detailing these transactions along with their Tax Return, these disclosures are also subject to certain thresholds. Additionally, if a Taxable Person’s transactions exceed certain thresholds defined in ministerial decision below, they must maintain a master file and a local file in the prescribed format. These documents must be submitted to the FTA within 30 days of a request unless an extension is granted. Furthermore, the FTA can request additional information to verify compliance with the Arm’s Length Principle, which must also be provided within 30 days. This documentation framework ensures transparency, compliance, and proper assessment of intercompany transactions, aligning UAE tax regulations with international transfer pricing standards.
Ministerial Decision No. 97 of 2023: Transfer Pricing Documentation Requirements
Ministerial Decision No. 97 of 2023 establishes the conditions for maintaining transfer pricing documentation under the UAE Corporate Tax Law. It mandates that businesses meeting specific revenue thresholds must maintain a master file and a local file in accordance with Article 55 of the Corporate Tax Law. Specifically, this applies to a Taxable Person, for any time during the relevant Tax Period, is a Constituent Company of a Multinational Enterprises Group with a consolidated group revenue of AED 3.15 billion or more or UAE-based businesses (Taxable Person) with annual revenue of AED 200 million or more.
The local file must include transactions with Non-Residents, Exempt Persons, and Residents subject to different corporate tax rates or electing specific tax treatments. However, transactions with certain Resident Persons, natural persons acting independently, and some partnerships are excluded unless they are under detailed control or exclusive business arrangements. The Federal Tax Authority (FTA) will assess whether entities are genuinely independent based on business conduct and transaction nature. This decision aligns UAE tax regulations with international transfer pricing standards, ensuring transparency, compliance, and proper tax reporting for related party transactions.
However, as an exception, any Taxable Person that is part of a UAE headquartered group that is not an MNE Group (i.e. a group that does not have business establishments outside the UAE) is not required to maintain a Master File. However, they should maintain a Local File as per the above thresholds.
The UAE CbCR requirements are applicable to MNE Groups headquartered in the UAE with consolidated Group revenue equal to or above AED 3.15 billion (approximately EUR 750 million) during the Fiscal Year immediately preceding the reporting Fiscal Year
A Taxable Person not meeting either of the conditions is not required to maintain either a Master File or a Local File. In such cases, the Taxable Person is still required to maintain reasonable records to support the arm’s length nature of the Taxable Person’s transactions or arrangements with its Related Parties and Connected Persons. The FTA can request such information to be produced within (30) thirty days following a request by the FTA, or by any such other later date as the FTA directs
Transfer Pricing disclosure form
Pursuant to Article 55(1) of the Corporate Tax Law, all Taxable Persons who undertake transactions with Related Parties or Connected Persons (domestic or foreign) in the reporting Tax Period and are above a materiality threshold defined below are required to prepare and submit a general Transfer Pricing disclosure form, alongside their Tax Return.
The Transfer Pricing disclosure form is to be submitted alongside the Tax return within 9 months from the end of the relevant Tax Period.
Disclosure Thresholds in Related Party transaction Schedule of CTR
The purpose of this schedule is to disclose some of the high value transactions with Related Parties as defined in Article 35 of the Corporate Tax Law. This Schedule should be completed by all Taxable Persons who have transactions with Related Parties in the Tax Period where the aggregate value of all transactions with all Related Parties recorded in the Financial Statements or at Market Value exceeds AED 40 million. Once you exceed the above threshold, transactions with Related Parties where the aggregate transaction value per category with all Related Parties exceeds AED 4 million, must be disclosed. Please Note that Dividends declared between Related parties do not need to be disclosed in this schedule and should not be taken into account in determining the AED 40 million or AED 4 million thresholds referred to above. In the schedule, gross income (Revenue) and expenditure should be reported separately. Figures are required for each Related Party in aggregate by type of income and/or expenditure.
Disclosure Thresholds in payments to connected person in Schedule of CTR
The purpose of this schedule is to disclose some of high value transactions with a Connected Person as defined in Article 36 of the Corporate Tax Law. The Schedule is to be completed only if the aggregate value of transactions with Connected Persons (including their Related Parties) exceeds AED 500,000. Not all Connected Person transactions are required to be disclosed here. This schedule should be completed for each Connected Person where the aggregate payment or benefit exceeds AED 500,000 per Connected Person (together with its Related Parties).
Among these, FTA implements several basic principles for transfer pricing:
The Arm’s Length Principle requires the transactions between related and connected person to be accounted for at arms-length basis i.e. they are treated as being by the standard for transactions between unrelated parties, to prevent the shifting of profits to a low-tax jurisdiction.
Businesses must maintain detailed transfer pricing documentation in case they meet the prescribed threshold, including:
The UAE follows internationally accepted transfer pricing methods, including:
As the UAE adopts international tax regulations, businesses must carefully navigate transfer pricing (TP) requirements. Non-compliance can lead to significant financial and reputational risks, making it essential for companies to establish robust TP policies and maintain proper documentation.
Article 50 of the Corporate Tax Law allows the FTA to counteract or adjust transactions or arrangements that are not entered into or carried out for a valid commercial reason. If the main purpose of a transaction is to obtain a Corporate Tax advantage that is not consistent with the intention or purpose of the Corporate Tax Law, the FTA may take action to change the outcome of such transaction or arrangement. Where the arrangements made in relation to the Controlled Transaction differ from those which would have been adopted by independent parties, the FTA may, if deemed appropriate, adjust or disregard the Controlled Transaction and replace it with an alternative transaction.
Here are the key risks and challenges associated with transfer pricing in the UAE:
With the UAE’s growing emphasis on tax compliance, businesses must proactively prepare Robust Transfer pricing documentation. Robust TP documentation can help mitigate financial risks, avoid penalties, and ensure smooth interactions with the Federal Tax Authority (FTA). A well-documented TP policy and Local & master file not only enhances compliance but also strengthens a company’s credibility in the eyes of regulators and stakeholders.
At Stratrich Consulting, we specialize in transfer pricing advisory and documentation services, helping businesses navigate complex TP regulations, optimize tax efficiency, and minimize risks. Our expert team ensures that your TP documentation align with OECD global best practices and UAE tax laws.
Here are key guidelines to prepare Robust transfer pricing documentation:
By partnering with Stratrich Consulting, your business can confidently meet transfer pricing obligations and safeguard against regulatory challenges.
Transfer pricing is a crucial element of the UAE’s evolving tax framework. By adhering to the Arm’s Length Principle and maintaining precise documentation, businesses can avert penalties, audits, and tax adjustments and reassessments. A robust transfer pricing policy and documentation ensures compliance and boosts transparency, shareholder confidence, and credibility in the UAE’s competitive market.
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