Transfer Pricing in the UAE: What Businesses Need to Know

Transfer Pricing refers to the pricing of transactions between Related Parties and Connected Persons.

These transactions may involve:

For example, a UAE company may pay a management fee to its overseas parent company.

Another UAE company may purchase goods from a related group entity.

A company may also provide administrative, technical or financial services to another group company.

In each case, the price or terms of the transaction may affect the taxable income of the entities involved.

Transfer Pricing rules are intended to ensure that transactions are conducted on an arm's length basis.

The arm's length principle requires transactions between Related Parties and Connected Persons to be priced as if they were conducted between independent parties under comparable conditions.

For example, if an independent company would normally charge AED 100,000 for a particular service, a related-party transaction for the same or substantially similar service should be assessed to determine whether the price is commercially appropriate.

The analysis may consider:

The arm's length principle is not necessarily based solely on the amount invoiced.

The underlying commercial substance of the transaction should also be considered.

A business should therefore be able to explain:

Related Parties generally include persons or entities connected through ownership, control or other relationships defined under the Corporate Tax rules.

Examples may include:

The exact determination of whether parties are Related Parties depends on the applicable Corporate Tax rules.

Businesses should review their corporate structure carefully to identify all relevant relationships.

A transaction should not be assumed to be an independent transaction merely because it is between two separate legal entities.

Connected Persons may include individuals and persons who have a particular relationship with a Taxable Person.

Examples may include:

Transactions with Connected Persons may require specific review.

For example, a company may have transactions involving:

These transactions should be appropriately recorded and reviewed.

Yes.

Transfer Pricing rules may apply to transactions between Related Parties and Connected Persons located in the UAE as well as to cross-border transactions.

This means that the rules may apply to transactions between:

The Federal Tax Authority confirms that Transfer Pricing rules apply to both domestic and cross-border transactions. (tax.gov.ae)

Businesses should therefore not assume that a transaction is outside the scope of Transfer Pricing merely because both parties are located in the UAE.

Businesses should consider the following types of transactions.

Management Fees

A group company may charge a UAE subsidiary for:

The business should assess whether the services were actually provided and whether the fee is commercially reasonable.

Intercompany Loans

Loans between related entities should be reviewed for:

Royalties and Intellectual Property

Payments for the use of:

may require Transfer Pricing analysis.

Purchase and Sale of Goods

Businesses that purchase or sell products with group entities should review:

Cost Allocations

Group costs allocated to UAE entities should be supported by a reasonable allocation methodology.

Guarantees

Guarantees provided between Related Parties may require review of the commercial benefit and applicable pricing.

Transfer Pricing directly affects the amount of income and expenditure recorded by Related Parties.

For example:

The pricing of these transactions may affect:

The UAE Corporate Tax framework therefore requires taxpayers to consider whether Related Party and Connected Person transactions comply with the arm's length principle.

A Taxable Person may be required to submit information relating to its transactions with Related Parties and Connected Persons as part of the Corporate Tax compliance process.

The Transfer Pricing disclosure process may require information relating to:

The specific disclosure requirements depend on the applicable rules and the information required as part of the Corporate Tax Return process.

Businesses should therefore identify relevant transactions before preparing their Corporate Tax Return.

Certain businesses may be required to maintain Transfer Pricing documentation in the form of a Master File and Local File.

Master File

A Master File generally provides an overview of the Multinational Enterprise Group and may include information relating to:

Local File

A Local File generally contains detailed information about the UAE entity and its Related Party and Connected Person transactions.

It may include:

The Federal Tax Authority describes the Master File as an overview of the group's global activities and the Local File as a more detailed analysis of the local entity's Related Party and Connected Person transactions. (tax.gov.ae)

A Taxable Person may be required to maintain a Master File and Local File where the applicable conditions are met.

The relevant thresholds include circumstances where:

The detailed requirements and exclusions should be assessed under the applicable legislation and Ministerial Decision. (mof.gov.ae)

Businesses that fall below these thresholds may still need to comply with the arm's length principle.

Therefore, the absence of a Master File or Local File requirement does not automatically mean that Transfer Pricing rules do not apply.

The appropriate Transfer Pricing method depends on the nature of the transaction and the available information.

Common internationally recognised methods include:

Comparable Uncontrolled Price Method

This method compares the price charged in a controlled transaction with the price charged in a comparable transaction between independent parties.

Resale Price Method

This method may be relevant where a company purchases goods from a Related Party and resells them to independent customers.

Cost Plus Method

This method may be used where a service provider earns a mark-up on its relevant costs.

Transactional Net Margin Method

This method compares the net profit margin earned in a controlled transaction with comparable independent transactions.

Transactional Profit Split Method

This method may be relevant where Related Parties contribute significantly to a transaction or business activity and profits need to be allocated based on their respective contributions.

The most appropriate method should be selected based on the facts and circumstances of the transaction.

A key part of Transfer Pricing analysis is understanding what each party actually does.

The analysis generally considers:

The party performing more significant functions, using important assets and assuming greater risks may generally be expected to receive an appropriate return reflecting its contribution.

The analysis should reflect the actual commercial substance of the arrangement.

Free Zone businesses should also consider Transfer Pricing requirements.

This is particularly important for businesses that:

A Qualifying Free Zone Person must also consider the arm's length principle in relation to relevant transactions.

Transfer Pricing should therefore form part of the broader Corporate Tax compliance framework for Free Zone businesses.

Small businesses may have reduced documentation requirements in certain circumstances.

For example, a person that elects for Small Business Relief does not have a requirement to maintain Transfer Pricing documentation, although the arm's length principle still applies. (tax.gov.ae)

Businesses should therefore distinguish between:

Even where formal documentation is not required, businesses should maintain sufficient commercial records to support the nature and pricing of significant related-party transactions.

An Advance Pricing Agreement (APA) may provide a mechanism for determining the appropriate Transfer Pricing methodology for certain transactions in advance.

An APA may be relevant for businesses with:

The Federal Tax Authority has published guidance relating to Advance Pricing Agreements as part of the UAE Corporate Tax framework. (tax.gov.ae)

Businesses considering an APA should assess whether the process is appropriate for their circumstances.

Businesses may face several common challenges.

Failure to Identify Related Parties

A business may not properly identify all entities and persons that fall within the relevant definitions.

Using Arbitrary Pricing

Prices may be set without a proper commercial or economic basis.

Unsupported Management Fees

A company may pay management fees without sufficient evidence that services were actually provided.

Inadequate Intercompany Loan Documentation

Loans may lack appropriate agreements, interest rates or repayment terms.

Incorrect Cost Allocations

Group costs may be allocated without a clear and reasonable methodology.

Ignoring Domestic Transactions

Businesses may incorrectly assume that Transfer Pricing only applies to cross-border transactions.

Lack of Documentation

The business may not maintain agreements, invoices, calculations or supporting analysis.

Inconsistent Accounting Treatment

The terms of a contract may not match the accounting treatment or actual transaction.

Last-Minute Compliance Review

Transfer Pricing analysis performed only shortly before the Corporate Tax filing deadline may result in incomplete documentation.

Practical Transfer Pricing Compliance Checklist

Businesses should consider the following: