Transfer Pricing (TP) has become an essential compliance area for businesses operating in the UAE following the introduction of corporate taxation. At HayyaTax, we regularly assist clients in navigating these complex regulations to ensure their related-party transactions meet the required standards. This article provides a comprehensive overview of Transfer Pricing in the UAE, its regulatory framework, and key compliance requirements.
What is Transfer Pricing?
Transfer Pricing refers to the pricing methodologies applied to transactions between related entities under common ownership or control. These transactions may involve goods, services, financing arrangements, or intangibles such as intellectual property. The core objective of transfer pricing regulations is to ensure these transactions are priced according to market standards—specifically, that they comply with the “arm’s length principle.”
Regulatory Framework in the UAE
The UAE government introduced comprehensive corporate tax laws with Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. These laws, effective from June 1, 2023, include transfer pricing regulations that follow the Organization for Economic Cooperation and Development’s (OECD) approach, aligned with the three-tier documentation approach under Base Erosion and Profit Shifting (BEPS) Action Plan 13.
The UAE’s corporate tax rates vary between 0%, 9%, or 15% on taxable income, depending on the entity’s status and location. Transfer pricing regulations serve as a critical measure to promote transparency and prevent tax base erosion or profit shifting.
On October 23, 2023, the Federal Tax Authority (FTA) released the Transfer Pricing Guide, offering detailed insights and practical advice for taxpayers. This guide closely aligns with the OECD Transfer Pricing Guidelines and provides comprehensive guidance on the UAE’s TP framework.
Key Transfer Pricing Concepts
1. Arm’s Length Principle
The cornerstone of transfer pricing regulations globally, including in the UAE, is the arm’s length principle. This principle requires that transactions between related entities must be conducted as if they were between independent parties operating in an open market. In essence, the pricing should reflect genuine market conditions rather than being artificially manipulated to minimize tax liabilities.
2. Related Party Transactions
Under the UAE’s transfer pricing framework, related party transactions include interactions between entities that share common ownership or control (generally defined as 50% or more ownership, voting power, or interest). This encompasses transactions between:
- Parent companies and their subsidiaries
- Sister companies within the same group
- Entities where individuals hold significant control or interest
The scope of related-party transactions covers various arrangements, including:
- Sale or purchase of goods
- Provision or receipt of services
- Royalties and intellectual property exploitation (trademarks, tradenames, right to use, etc.)
- Financing arrangements (loans, cash pooling, guarantees, etc.)
3. Comparability Analysis
A fundamental aspect of transfer pricing compliance is conducting a proper comparability analysis to determine whether related-party transactions meet the arm’s length standard. This involves comparing the terms of the controlled transaction with similar transactions between unrelated parties.
Five key factors are considered in a comparability analysis:
- The nature of the transaction
- The functions performed by each party
- The risks assumed and assets deployed
- The contractual terms of the transaction
- The economic conditions of the market
Transfer Pricing Documentation Requirements
The UAE has adopted the three-tiered documentation approach recommended by the OECD:
1. Master File
The Master File provides a high-level overview of the multinational enterprise (MNE) group’s global business operations, including:
- Organizational structure
- Description of the group’s businesses
- Intangibles strategy
- Financial arrangements
- Tax positions
2. Local File
The Local File contains detailed information about specific intra-group transactions of the local taxpayer, including:
- Detailed description of the business and strategy
- Information on controlled transactions
- Comparability analysis
- Selection and application of transfer pricing methods
3. Country-by-Country Report (CbCR)
For large multinational groups with consolidated revenue exceeding AED 3.15 billion (approximately EUR 750 million), CbCR requirements apply. This report provides a country-by-country breakdown of revenue, profit, tax, and economic activities.
Transfer Pricing in Free Zones vs. Mainland UAE
Free Zones
Companies operating in UAE free zones have traditionally enjoyed tax benefits, including potential eligibility for the 0% corporate tax rate. However, these entities are not exempt from transfer pricing regulations. Free zone companies engaging in related-party transactions must ensure compliance with the arm’s length principle, particularly for:
- Transactions with mainland UAE entities
- Cross-border transactions with overseas related parties
- Transactions with other free zone entities
The risk of non-compliance is particularly significant for entities benefiting from preferential tax rates, as authorities may scrutinize these arrangements more closely.
Mainland UAE
Businesses operating in mainland UAE, especially those part of multinational groups, must fully comply with transfer pricing regulations. This includes preparing and maintaining appropriate documentation to support the arm’s length nature of their related-party transactions.
Failure to comply with transfer pricing regulations in either free zones or mainland UAE could result in:
- Tax adjustments
- Penalties
- Increased scrutiny during tax audits
- Potential double taxation
Transfer Pricing Methods
The UAE follows the OECD-approved transfer pricing methods:
- Comparable Uncontrolled Price (CUP) Method: Compares the price charged in a controlled transaction with the price charged in comparable uncontrolled transactions.
- Resale Price Method: Evaluates whether the gross margin that a reseller earns from a controlled transaction is at arm’s length by comparing it with gross margins in comparable uncontrolled transactions.
- Cost Plus Method: Examines the markup on costs incurred by the supplier in a controlled transaction compared to markups in comparable uncontrolled transactions.
- Transactional Net Margin Method (TNMM): Examines the net profit margin relative to an appropriate base that a taxpayer realizes from a controlled transaction.
- Profit Split Method: Identifies the combined profit to be split between associated enterprises in a controlled transaction and then splits those profits based on economically valid criteria.
Practical Transfer Pricing Compliance Steps
Businesses operating in the UAE should take the following steps to ensure transfer pricing compliance:
- Identify Related Parties: Map out all entities and individuals that qualify as related parties under the UAE regulations.
- Document All Related-Party Transactions: Maintain comprehensive records of all transactions with related parties, including their nature, volume, and pricing methodology.
- Conduct Functional Analysis: Analyze the functions performed, assets used, and risks assumed by each entity involved in related-party transactions.
- Perform Comparability Analysis: Identify comparable uncontrolled transactions and analyze differences that may affect pricing.
- Select and Apply Appropriate TP Method: Choose the most suitable method for determining arm’s length prices based on the nature of the transaction.
- Prepare Documentation: Develop and maintain the required documentation, including Local File and Master File where applicable.
- Review and Update Regularly: Ensure documentation and pricing policies are reviewed periodically, especially when there are changes in business operations or market conditions.
How HayyaTax Can Help
At HayyaTax, our team of transfer pricing specialists offers comprehensive support for businesses navigating the UAE’s transfer pricing landscape:
- Transfer Pricing Documentation: Preparation of Master File, Local File, and assistance with Country-by-Country reporting
- Benchmarking Studies: Conducting robust comparability analyses using global accredited databases
- TP Policy Development: Creating and implementing transfer pricing policies aligned with your business model
- Advance Pricing Arrangements: Assistance in obtaining certainty through APAs where available
- Dispute Resolution: Support during tax authority audits and in resolving transfer pricing disputes
- Training and Workshops: Customized training to enhance internal understanding of transfer pricing requirements
Conclusion
Transfer pricing has become a critical compliance area for businesses operating in the UAE following the introduction of corporate taxation. With the Federal Tax Authority expected to increase scrutiny of related-party transactions over time, ensuring robust transfer pricing documentation and policies is essential to mitigate tax risks and avoid penalties.
For businesses operating across free zones and mainland UAE, particularly those within multinational groups, proactive management of transfer pricing is no longer optional but a necessary component of tax compliance strategy. By embracing best practices in transfer pricing, businesses can not only ensure regulatory compliance but also optimize their tax position while minimizing the risk of disputes with tax authorities.
For expert guidance on Transfer Pricing in the UAE and to ensure compliance with the latest Corporate Tax regulations, contact HayyaTax for a consultation. Our transfer pricing specialists bring extensive experience across various industries and utilize global accredited databases to deliver high-quality benchmarking and documentation services.
Corporate Tax Services Offering in UAE
HayyaTax is the leading expert in corporate tax consultancy in Dubai, UAE, offering a comprehensive range of services to cater to your corporate tax needs. The services include:
Corporate Tax Advisory Services
As your trusted Corporate Tax Consultants in Dubai, we evaluate the implications of Corporate Tax implementation on businesses. We provide expert guidance on withholding taxes and available exemptions.
Additionally, we offer insights on corporate tax matters related to group entities, highlighting potential risks and addressing challenges faced by taxpayers.
Compliance Services
Our services encompass Corporate Tax registration assistance and the calculation of taxable income subject to Corporate Tax regulations in Dubai, UAE. We handle the meticulous computation of your tax liability and ensure the timely preparation and submission of tax returns.
Tax Optimization Strategies
We, as your reliable Corporate Tax Consultants, focus on optimizing your corporate tax strategy. Our seasoned professionals examine your business structure, financial transactions, and operations to pinpoint opportunities for tax savings.
Whether it’s through meticulous tax planning, the utilization of incentives, or the exploration of tax-efficient structures, we work to minimize your tax liabilities while adhering to Dubai’s tax laws.
Representation Services
In our representation services, we provide invaluable support to our clients. This includes preparing written submissions, responding to notices, and filing written appeals against unfavorable tax adjustments or penalties imposed by tax authorities concerning Corporate Tax implementation in Dubai, UAE.
We also represent our clients directly before tax authorities, allowing them to concentrate on their core business activities.
Transfer Pricing Consultation
For multinational corporations operating in Dubai and Abu Dhabi, navigating the intricacies of transfer pricing is vital. Our team of experts specializes in transfer pricing regulations, ensuring you establish and maintain arm’s length pricing for transactions and agreements involving related parties and connected individuals.
We provide comprehensive documentation services to support your transfer pricing policies, ensuring compliance and reducing the risk of disputes with tax authorities.
With our guidance, you can optimize your transfer pricing practices while maintaining full regulatory compliance in the UAE.
The tax experts listed above offer a comprehensive range of corporate tax consulting services that can help businesses stay compliant with tax regulations and maximize their corporate tax savings.
Additionally, UAE Corporate Tax Consultants are well-versed in corporate tax advisory services, corporate laws, corporate accounting and budgeting assistance, corporate tax planning, and consulting.
FAQs
What Is “Business” and “Business Activity” Under UAE Corporate Tax Law?
Within the framework of the UAE Corporate Tax Law, the terms “Business” and “Business Activity” serve to pinpoint the circumstances under which specific individuals or entities incur liability for UAE Corporate Tax. Essentially, they establish the categorization of a Person as a Taxable Person.
In this context, a “Business” encompasses any economic endeavor conducted by an individual or entity, regardless of its duration.
It is inherently driven by a profit motive and necessitates a systematic and organized approach to its execution. It is crucial to note that, for UAE Corporate Tax purposes, a Business or Business Activity retains its classification even if it does not yield a profit.
When applying the Corporate Tax Law to companies and other legal entities, all activities carried out and assets utilized or held are generally regarded as components of a “Business.”
How to Determine Resident Persons Under UAE Corporate Tax?
Entities incorporated within the UAE, including Limited Liability Companies, Private Joint Stock Companies, Public Joint Stock Companies, and other UAE legal entities, are designated as Resident Persons and consequently subject to Corporate Tax.
Any entity incorporated in the UAE is automatically recognized as a “Resident” Person for UAE Corporate Tax. Furthermore, natural persons engaged in a Business or Business Activity within the UAE are also classified as Resident Persons for UAE Corporate Tax.
In the case of foreign companies, they may attain Resident Person status for UAE Corporate Tax if they are “effectively managed and controlled” within the UAE.
The assessment of where a company is effectively managed and controlled involves a comprehensive evaluation of all relevant facts and circumstances, with a pivotal factor being the location where the company’s board of directors makes strategic decisions affecting the company.
Who Are Non-resident Persons Under UAE Corporate Tax?
Under the provisions of the Corporate Tax Law, a legal entity is categorized as a Non-Resident Person if it is incorporated in a foreign jurisdiction, and its effective management and control occur outside the UAE.
For natural persons, the designation of Non-Resident Person for UAE Corporate Tax is applicable when they are not engaged in a taxable Business or Business Activity within the UAE.
Are Non-resident Persons Taxable Under UAE Corporate Tax?
Non-resident persons are subject to UAE Corporate Tax under specific conditions, which encompass:
- Taxation on income attributed to their Permanent Establishment in the UAE.
- Taxation on income linked to a nexus within the UAE, as determined by Cabinet Decision No. 56 of 2023.
- Taxation on income sourced within the UAE is subject to a 0% Withholding Tax.
How to Determine Taxable Income Under UAE Corporate Tax?
The calculation of n Taxable Income for a given Tax Period relies on the net profit or loss of a business, as reported in its financial statements prepared in compliance with International Financial Reporting Standards (IFRS).
However, adjustments are necessary for specific items stipulated in the Corporate Tax Law and related implementing decisions.
These adjustments encompass unrealized gains and losses (subject to the election regarding the application of the realization principle), exempt income like qualifying dividends and capital gains, gains or losses stemming from transfers within a Qualifying Group, and deductions not allowable for Corporate Tax purposes, among others.
What Is the Relevant Tax Period Under Corporate Tax in UAE?
Since Corporate Tax is imposed annually, it is imperative to specify the “Tax Period.” This period corresponds to the Financial Year used for the preparation of financial statements, typically following the Gregorian calendar year (from January 1 to December 31).
However, if a business employs a different 12-month period for financial statement preparation, that specific Financial Year is considered.
What Is the UAE Corporate Tax Rate?
The applicable Corporate Tax rate is as follows:
| Natural persons and juridical persons | Qualifying Free Zone Persons |
| 0% for Taxable Income up to and including AED 375,000. | 0% on Qualifying Income. |
| 9% for Taxable Income exceeding AED 375,000. | 9% on Taxable Income that is not Qualifying Income, as specified in Cabinet Decision No. 55 of 2023. |