The New Transfer Pricing Regimein the United Arab Emirates

A New ERA for United Arab Emirates

Introduction

On 31 January 2022, the Ministry of Finance (MoF) of the United Arab Emirates (UAE)
announced that the UAE will introduce a Federal Corporate Tax (CT) on business
profits that will be effective for financial years starting on or after 1 June 2023. Among its 70 Articles and 20 Chapters lies a pivotal component – “The Transfer Pricing
Rules”. These transfer pricing rules ensure that the price of a transaction is not
influenced by the relationship between the parties involved.

Applicability

The UAE TP regime appears to apply broadly to any arrangements between related
parties and connected persons. These rules should apply to all taxpayers, including
corporations, partnerships, trusts, and any other taxpayer. In addition, the rules
apply equally to foreign owned enterprises and domestically owned enterprises regardless of the tax regime they may fall within such as that of the mainland or
under a Free Zone.

The TP regime should apply equally to solely UAE and cross-border
transactions or arrangements.

3 . Transfer Pricing Regulations in the UAE

The UAE’s Corporate Tax Law includes transfer pricing rules under ‘Chapter Ten:
Transactions with Related Parties and Connected Persons’ to enforce the arm’s
length principle in transactions between related parties. To align with international
standards, the UAE’s transfer pricing rules adhere to OECD’s standard. This
alignment allows Taxable Persons to utilize relevant OECD guidance when applying
transfer pricing regulations.

3.1. Article 34 – Arm’s Length Principle

Article 34 gives the FTA, power to reallocate income or expenses between related
parties and connected persons to clearly reflect taxable income or to prevent the
evasion of taxes . It seeks to ensure that transactions between Related Parties are
carried out on arm’s length terms as if the transaction was carried out between
independent parties.
Article 34 paragraph 3 provides specific guidance as to appropriate methodologies.
Consistent with the OECD TP Guidelines, the arm’s length methodologies are as
follows:

• Comparable Uncontrolled Price (CUP) method;
• Resale Price (RP) method;
• Cost-Plus (CP) method;
• Profit Split Method (residual or contribution) (PSM)
• Transactional Net Margin Method (TNMM).

Article 34 does not prescribe any particular methodology or preference for
the order in which methodologies might be applied to arrive at an arm’s
length outcome. The most appropriate methodology should be adopted
based on the facts and circumstances of the case & OECD Guidelines.

3.2 Article 35 – Related Party

The UAE TP rules define related parties under Article 35 as a natural person or
juridical person who has, directly or indirectly, a relationship through ownership,
control, or kinship

3.2.1 Ownership

Although the ownership and control definitions are generally aligned with the
OECD TPG and the OECD Model Tax Convention definitions, the UAE introduced a
threshold of 50% for ownership and defined the criteria of ‘control’.

3.2.2.Control

The concept of control under the UAE TP rules under Article 35 of the CT Law is as
follows:

• Ability to exercise 50% or more of the votig rights of another person
• Ability to receive 50% or more of the profits of another Person
• Ability to determine the composition of 50% or more of the Board of Directors of another Person
• Ability to determine or exercise significant influence on the conduct of the business and affairs of another Person.

Although the three considerations on ability to exercise voting rights, receiving
profits and establishing the board of directors are straightforward in delineating
additional considerations under control, the definition on ability to determine or
exercise significant influence seems to be open-ended and inconclusive.
In addition, the UAE introduced the concept of kinship as part of its related party
definitions for individuals.

3.2.3.Kinship

The definition of kinship or affiliation is established by the relationship of two or
more individuals who are related to the fourth degree of kinship or affiliation,

which refers to the number of steps between two persons determined by
counting the generations separation one person from a common ancestor. The
fourth degree of kinship would include great-great grandparents, great-greatgrandchildren, nieces, and nephews. This may have broad consequences for the
businesses operating in the UAE as there are many family-owned businesses in
the UAE.

3.2.4.Permanent Establishment

A permanent establishment or branch, and partners in the same unincorporated
partnerships are also considered as a related party to the UAE TP rules. Also,
related party definitions include a trustee, founder, settlor or beneficiary of a
trust or foundation.

What’s NEW in UAE TP Rules?

• A threshold of 50% for ownership and defined the criteria of ‘control’.
• The concept of kinship as part of its related party definitions for individuals.
• The definition of control – ability to determine or exercise significant influence seems to be open-ended and inconclusive

3.3. Article 36 – Payment to Connected Persons

The definition of a connected person as per Article 36 of the CT Law 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 is also considered a connected person.
• The UAE TP rules also refer to individuals related to the taxable person’s owner, director, or officer. Partners in the same unincorporated partnership are also considered as connected persons.

1. corresponds with the market value of the service provided;
2. are incurred wholly and exclusively for the taxpayer’s business.

As a measure to tackle tax base erosion, the UAE TP rules under Article 36 state
that payments to connected persons shall be deductible if the following conditions
are met:

To determine that a payment or benefit corresponds with the market value of the service, the transaction must be priced on an arm’s length basis. A key observation is that these conditions must be considered for the deductibility of payments.

4. Transfer Pricing Documentation

4.1. Disclosure Form

All businesses must maintain information on transactions with Related Parties and
Connected Persons. Certain businesses are obligated to submit this information in
a Disclosure Form along with their tax return.

4.2. Master File & Local File

The Master File and Local File Documentation must be maintained in the UAE under the following conditions,

• If the Taxable Person’s revenue is AED 200 million or more.
• If they are a Constituent Entity of a Multinational Group with a Consolidated Group Revenue of AED 3.15 billion or more (regardless of standalone revenue of the UAE constituent entity).

4.3. CbCR

In addition, under the UAE’s CbCR legislation Ultimate Parent Entities of UAE headquartered Multinational Groups with Consolidated Group revenue exceeding AED 3.15 billion in previous financial year must comply with CbCR notification and report filing requirements.

It’s important to note that the thresholds specified in Ministerial Decision No. 97 of 2023 for maintaining the Local File and Master File are specific to documentation requirements and independent of the Arm’s Length Standard.

4.4. Benchmarking

The Transfer Pricing Benchmarking Analysis is a separate process designed to determine taxable income based on the arm’s length principle. It is highly recommended for businesses to adhere to the arm’s length standard in all transactions involving related parties and connected persons. Reporting this adherence in the Disclosure Form, along with the Tax Return, significantly impacts the determination of taxable income for Corporate Tax purposes.

4.5. Notice

Additionally, as per Article 55(4), upon request by the Authority, a Taxable Person must provide any requested information (including disclosure form, three tier documentation, TP benchmarking analyses & policies, and any other supporting documentation) to support the arm’s length nature of the Taxable Person’s transactions or arrangements with Related Parties and Connected Persons, within 30 days following the request by the Authority, or any later date directed by the Authority

Article 55 – Taxpayers having transaction with related parties and connected persons shall complete a Disclosure Form with their Corporate Income Tax return and prepare & maintain Local File, Master File and CbCR as applicable.

5. Exemptions

5.1. Article 18 – Small Businesses

Small businesses claiming relief as stated are exempt from transfer pricing documentation rules. However, qualifying free zone entities are required to comply with these rules, as stipulated in Article 18(1)(d).

5.2. Article 26 – Transfer of Assets/Liabilities within MNE

Transfers of assets and/ or liabilities within a group may also qualify for reliefunder certain conditions based on Article 26. The CT Law provides guidance that for transfers within the same qualifying group, it must be transferred at its net book value/ market value at the time of the transfer and that neither a gain nor a loss arises (i.e., on an arm’s length basis).

5.3. Article 27 – Restructuring

Article 27 of the CT Law states that transfers or restructurings within a group could qualify for relief (i.e., no gain or loss needs to be considered for determining the taxable income) under certain conditions. The arm’s length principle provisions under Article 34 may be relevant if the group cannot maintain the qualification conditions as specified under paragraph 2 and a potential claw back of the relief
could be applied.

5.4. Article 42 – Tax Group

In relation to the taxable income of a tax group, Article 42 of the CT Law states that
transactions between members of a tax group are eliminated in the consolidation
of the group’s financial statements, and hence there is no need to comply with
the TP rules under such circumstances. If a member of a tax group needs to
compute its standalone taxable income for the purpose of utilizing tax lossesincurred before joining the group and/ or when leaving the group, the TP rules
would apply.

In all above cases, a transfer pricing benchmarking analysis must be
undertaken to substantiate the arm’s length or market value criteria.

6. Transactions covered

The UAE Transfer Pricing Rules are applicable to various categories of transactions involving Related Parties and Connected Persons. These categories include:

1. Goods: Transactions related to purchase, sale, and transfer of goods used in manufacturing and distribution activities, including raw materials, traded goods and finished goods.
2. Services: Provision and receipt of diverse services, ranging from IT, sales and marketing, engineering, R&D, finance, accounting, legal, managerial, to procurement.
3. Tangible Property: Transactions involving the purchase, sale, transfer, and lease of tangible property.
4. Capital Transactions: Activities related to the issuance, investment, and transfer of equity and preference shares, as well as hybrid instruments such as CCDs, CCPs, OCDs, and OCPs.
5. Intangible Property (IP): Royalties and license fees associated with the utilization of intangible assets.
6. Financing Arrangements: Intra-group loans and guarantees.
7. Intra-group Services (IGS) and Cost Contribution Arrangements (CCAs).
8. Business Restructurings and Reorganizations: Transfer of shares, tangible and intangible assets, business combinations, changes in contractual terms, parties, and characterization.
9. Transactions with Connected Persons: Payments made to owners, shareholders, directors, officers, partners, and their relatives, such as remuneration, rent, dividends, and interest on loans.

7. Advance Pricing Agreement

Businesses could apply for clarifications in relation to the CT Law or for the conclusion of an Advanced Pricing Agreement (APA) for (related party) transactions or arrangements based on Article 59 of the CT Law. An APA in the UAE would effectively result in the protection and support of the UAE authorities in cases where a foreign tax authority would make a one-sided TP adjustment for a transaction that is subject to the APA. With the combination of the UAE’s extensive network of double tax treaties, businesses could apply for a Mutual Agreement Procedure to minimize/resolve the risk of double taxation. This may provide businesses with a strategic benefit to obtain upfront certainty in the
UAE in respect of their TP arrangements.

Businesses also can apply for a bilateral APA between countries to get certainty for both sides of the transaction. The process for applying for an APA should be in the form and manner prescribed by the authorities.

8. Conclusion

The developments in relation to TP in the UAE have far-reaching tax and non-tax/
operational implications for affected businesses. Alongside TP, these implications
may also relate to legal structure, business model, contracting, accounting, profit
and systems and data organization, and the organization of the tax function with a
potential impact for various stakeholders within affected businesses.
Considering the timeframe left to prepare for the implementation of TP rules,
companies should start assessing the impact for their business and what they need
do to be prepared given the complexity of these rules.
Source : https://tax.gov.ae/en/default.aspx
Disclaimer: The views expressed herein are not binding on UAE law, interpretation
may vary on case-by-case basis. For further information, please get in touch with
our experts.