What are the UAE Corporate Tax Implications of the Transfer Pricing Rules?

Transfer pricing rules seek to ensure that transactions between related parties are carried out on arm’s length terms (i.e. as if the transaction was carried out between independent parties).

Affected UAE businesses will need to comply with Transfer Pricing rules and documentation
requirements set with reference to the OECD Transfer Pricing Guidelines, which are underpinned
by the ‘Arm’s Length Principle’, and seek to replicate pricing between related parties, as if these parties were unrelated.

The expected Transfer Pricing rules in the UAE will be applicable to intra-group transactions for entities subject to Corporate Tax in the UAE. Multinational groups with entities in the UAE that have not recently updated their Transfer Pricing policies are recommended to do so at the earliest opportunity and certainly, before the UAE Corporate Tax regime becomes effective.

It is expected that Transfer Pricing rules will be published within and as part of the detailed UAE Corporate Tax regime-related rules. It is known from the MoF’s FAQ that the UAE Corporate Tax regime will become effective for financial years starting 1 June 2023 and it is expected that Transfer Pricing rules associated with the Corporate Tax regime will also be effective for financial years from this date.

The Transfer Pricing rules will certainly impact the cross-border intra-group transactions of multinational groups with entities that are subject to Corporate Tax in the UAE. With respect to domestic
intra-group transactions, it remains to be seen whether the Transfer Pricing rules will affect these
entities that are subject to Corporate Tax in the UAE.

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What are Related Parties?

A related party is an individual or entity who has a pre-existing relationship with a business that is within the scope of the UAE Corporate Tax regime through ownership, control or kinship (in the case of natural persons).

There are different rules for determining whether parties involved in a transaction are considered “Related Parties” for UAE Corporate Tax purposes. These are summarised below:

How is Related parties different from Connected Persons?

The absence of personal income taxation in the UAE can generate incentives for individual owners of taxable businesses to erode the UAE Corporate Tax base by making excessive payments to themselves or persons connected with them. Accordingly, payments or benefits provided by a business to its “Connected Persons” will be deductible only if the business can demonstrate that the payment or benefit:

• Corresponds with the market value of the service provided; and
• is incurred wholly and exclusively for the purposes of the taxpayer’s business.

Connected Persons are different from Related Parties. A person will be considered as ‘connected’ to a business that is within the scope of the UAE Corporate Tax regime if he or she is:

• An individual who directly or indirectly has an ownership interest in, or controls, the taxable person
• A director or officer of the taxable person
• An individual related to the owner, director, or officer of the taxable person to the fourth degree of kinship or affiliation, including by birth, marriage, adoption, or guardianship
• Where the taxable person is a partner in an unincorporated partnership, any other partner in the same partnership
• A Related Party of any of the above

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What is Arm’s length principle?

All Related Party transactions and transactions with Connected Persons will need to comply with transfer pricing rules and the arm’s length principle as set out in the OECD Transfer Pricing Guidelines. In order for a transaction or arrangement between Related Parties or with a Connected Person to meet the arm’s length standard, the results of the transaction or arrangement must be consistent with what the results would have been if they had been between parties that are not related to each other.  

The arm’s length price will need to be determined using one of a set number of internationally recognised transfer pricing methods, or a different method where the business can demonstrate that the specified methods cannot be reasonably applied to determine an arm’s length result.

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What are the requirements for transfer pricing documentation?

Where relevant, the business will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons.  

A business will also need to maintain a master and local file (with format and content consistent with the requirements prescribed under OECD BEPS Action 13) where the arm’s length value of their Related Party transactions exceeds a certain threshold in the relevant tax period.

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Note: The information in this article is meant to provide an initial introduction to the proposed UAE Corporate Tax regime and not be used for individual or business decisions as it does not represent the final legislation by the Government. More information o the UAE CT regime will be made available in due course.