Transfer Pricing in the UAE: Are Your Inter-Company Deals Compliant?
The introduction of UAE Corporate Tax has brought a host of new concepts and compliance obligations for businesses. Perhaps none is more complex or more critical for groups of companies than Transfer Pricing. For decades, businesses in the UAE with multiple related entities could transact with each other freely without worrying about the tax implications of their pricing. That era is over. Now, every transaction between related companies is under the scrutiny of the Federal Tax Authority (FTA).
- Transfer Pricing in the UAE: Are Your Inter-Company Deals Compliant?
- The Core Concept: The Arm's Length Principle
- Who are "Related Parties"?
- The 5 Approved Transfer Pricing Methods
- Documentation: Your Compliance Cornerstone
- Navigate Transfer Pricing with EAS
- Frequently Asked Questions (FAQs)
- Are Your Inter-Company Deals Audit-Proof?
Transfer Pricing refers to the rules and methods for pricing transactions between enterprises under common ownership or control. The purpose of these rules is to ensure that related companies trade with each other on the same terms as they would with unrelated third parties. This prevents businesses from artificially shifting profits from a high-tax entity to a low-tax or no-tax entity to reduce their overall tax burden. With the UAE now a part of the global tax system, adhering to these international standards is mandatory.
This guide will break down the core concepts of the UAE’s new transfer pricing regime. We will explain the all-important “arm’s length principle,” the required documentation, and what your business needs to do now to ensure your inter-company dealings are fully compliant and can withstand FTA scrutiny.
Key Takeaways
- Transfer Pricing is Now Law in the UAE: All transactions between related parties must comply with the new rules under the Corporate Tax law.
- The Arm’s Length Principle is Key: The price of an inter-company transaction must be the same as if it were conducted between two independent, unrelated companies.
- Documentation is Mandatory: Businesses meeting certain thresholds must prepare and maintain a Master File and a Local File to justify their transfer pricing policies.
- It Applies to All Related Parties: This includes transactions between mainland and free zone entities, and between UAE companies and their foreign parent or subsidiary companies.
- Non-Compliance Carries Significant Risk: The FTA can adjust your taxable income and impose hefty penalties if your transfer pricing is not compliant.
The Core Concept: The Arm’s Length Principle
The entire global framework for transfer pricing is built on one simple idea: the arm’s length principle. This principle is enshrined in the UAE Corporate Tax Law and states that the pricing, terms, and conditions of a transaction between related parties must be the same as they would have been if the parties were not related.
Imagine your UAE-based manufacturing company sells goods to a related distribution company you own in Europe. The arm’s length principle requires that the price you charge your European company must be the same price you would charge a completely independent, third-party distributor for the same goods under the same conditions.
The fundamental question the FTA will ask is: “Would an independent third party have agreed to this price?” If the answer is no, your transfer pricing is likely non-compliant.
Who are “Related Parties”?
The rules apply to transactions between “Related Parties” and “Connected Persons.” This is broadly defined but generally includes:
- Two or more companies owned or controlled by the same person or group of persons.
- An individual and a company where the individual (or their relatives) owns 50% or more.
- A parent company and its subsidiaries.
- Two or more subsidiaries of the same parent company.
- A branch and its head office.
This includes transactions between a mainland UAE company and a related company in a UAE Free Zone.
The 5 Approved Transfer Pricing Methods
The FTA recognizes five standard methods, consistent with OECD guidelines, to determine if a transaction meets the arm’s length principle. The most appropriate method depends on the nature of the transaction.
- Comparable Uncontrolled Price (CUP) Method: Compares the price in the related-party transaction to the price in a comparable transaction between unrelated parties. This is the most direct method.
- Resale Price Method: Used for distributors. It starts with the price at which the product is sold to a third party and subtracts a gross margin to arrive at an arm’s length purchase price.
- Cost Plus Method: Used for manufacturers. It starts with the cost of producing the goods or services and adds an appropriate profit markup.
- Transactional Net Margin Method (TNMM): Compares the net profit margin of the related-party transaction to the net profit margins of comparable transactions by independent companies. This is one of the most commonly used methods.
- Profit Split Method: Used for highly integrated or complex transactions where it’s difficult to evaluate them separately. It splits the combined profit from the transaction between the related parties in a way that independent enterprises would have.
Documentation: Your Compliance Cornerstone
Proving that your pricing is at arm’s length requires extensive documentation. For businesses that meet certain revenue thresholds, preparing formal transfer pricing documentation is mandatory.
1. The Master File
The Master File provides a high-level overview of the entire multinational group’s business, including its organizational structure, key business activities, intangible assets, and its global transfer pricing policies.
2. The Local File
The Local File provides detailed information specific to the UAE entity. It describes the local company’s management structure, business strategy, and, most importantly, provides a detailed analysis of all its material related-party transactions, showing which transfer pricing method was used and why it is appropriate.
3. The Transfer Pricing Disclosure Form
When filing your annual Corporate Tax return, you must also submit a disclosure form. This form requires you to declare all your related-party transactions, the value of these transactions, and confirm that they adhere to the arm’s length principle.
Navigate Transfer Pricing with EAS
Transfer pricing is one of the most complex areas of Corporate Tax law. Getting it right requires a blend of tax knowledge, economic analysis, and strategic planning. Excellence Accounting Services (EAS) provides expert guidance to ensure your business is fully compliant.
Our Transfer Pricing Services Include:
- Transfer Pricing Policy & Advisory: We help you design and implement a compliant and efficient transfer pricing policy for your group.
- Documentation Preparation: Our team can prepare your Master File and Local File, including the necessary benchmarking studies, to ensure you meet all FTA requirements.
- Disclosure and Compliance: We assist with the preparation and submission of the annual transfer pricing disclosure form as part of your tax return process.
- Audit Support: In the event of an FTA query or audit, we can provide the necessary support and representation to defend your transfer pricing position.
Frequently Asked Questions (FAQs)
Yes, the arm’s length principle applies to all businesses with related-party transactions, regardless of size. However, the requirement to prepare formal Master and Local File documentation generally applies only to larger businesses that meet specific revenue thresholds.
The penalties can be severe. The FTA has the power to adjust your taxable income to what it would have been under the arm’s length principle, leading to a higher tax bill. In addition, there are specific penalties for failing to maintain or submit the required documentation on time.
No. You do not need to submit them automatically. However, you must have them prepared by the tax return filing deadline. The FTA can request them at any time, and you must be able to provide them within 30 days.
Yes, absolutely. This is a key focus area for the FTA. They will scrutinize transactions between a mainland company (subject to 9% tax) and a related Free Zone company (potentially subject to 0% tax) to ensure that profits are not being artificially shifted from the mainland to the Free Zone to avoid tax.
A benchmarking study is a crucial part of a Local File. It’s an economic analysis where you use databases to find comparable transactions between independent companies. This data is then used to determine an arm’s length range of prices or profit margins for your own related-party transactions.
Yes, it is very likely a problem. If the prices are not at arm’s length (i.e., not what you would charge a third party), the FTA can disregard them and recalculate your profit based on a market price, leading to a higher tax liability.
While not explicitly defined by a number, a material transaction is one that is significant enough in value or strategic importance that it could have a meaningful impact on the company’s profits. Your transfer pricing documentation should focus on these material transactions.
No. You must select the “most appropriate method” for each different type of transaction. The best method for the sale of goods (e.g., CUP or Resale Price) will be different from the best method for providing a management service (e.g., Cost Plus or TNMM).
No. The rules apply to all related-party transactions, including those between two companies located within the UAE (e.g., two LLCs in Dubai owned by the same person).
A strategic CFO or Fractional CFO plays a vital role. They are responsible for overseeing the company’s tax strategy, identifying related-party transactions, commissioning the necessary studies and documentation, and ensuring that the company’s pricing policies are both commercially sound and tax compliant. They manage the risk associated with transfer pricing.
Conclusion: A New Era of Scrutiny and Strategy
Transfer pricing is no longer an abstract concept for multinational giants; it is a tangible, mandatory compliance issue for any group of related companies in the UAE. Adhering to the arm’s length principle and maintaining robust documentation is not optional. It requires a proactive and strategic approach to pricing your inter-company deals.
By treating transfer pricing as a key area of your tax and business strategy, you not only ensure compliance and avoid penalties but also gain a deeper understanding of where your business truly creates value.
Are Your Inter-Company Deals Audit-Proof?
Our expert tax advisors can help you develop and document a compliant transfer pricing policy.
