Managing Inter-Company Transactions Under New Tax Law
With the implementation of the UAE’s Corporate Tax regime, one of the most significant shifts for businesses, particularly those operating within a group structure, is the intense scrutiny now applied to inter-company transactions. What were previously informal, internal arrangements for sharing costs, providing services, or moving goods between related entities are now subject to strict legal and economic principles. The era of arbitrary management fees and informal inter-company loans is over, replaced by a new mandate for transparency, justification, and robust documentation.
- Managing Inter-Company Transactions Under New Tax Law
- Part 1: The New Reality - Who Are "Related Parties" and "Connected Persons"?
- Part 2: The Arm's Length Principle - The Unbreakable Rule
- Part 3: Common Types of Inter-Company Transactions to Manage
- Part 4: Justifying Your Price - The Five Transfer Pricing Methods
- Part 5: The Documentation Mandate
- What Excellence Accounting Services (EAS) Can Offer
- Frequently Asked Questions (FAQs)
- Ensure Your Inter-Company Transactions are Compliant and Defensible.
This new focus is driven by the internationally recognized **Arm’s Length Principle**, a cornerstone of the UAE Corporate Tax Law. The Federal Tax Authority (FTA) is now empowered to ensure that profits are not artificially shifted between related companies to reduce the overall tax burden. For businesses, this means every transaction with a “Related Party” or “Connected Person”—whether domestic or cross-border—must be priced and structured as if it were conducted between two completely independent entities. Failing to do so can lead to significant tax adjustments, penalties, and disputes. This guide provides a strategic framework for understanding and managing your inter-company transactions in this new tax landscape, helping you navigate the complexities of Transfer Pricing and turn a compliance challenge into an opportunity for greater operational clarity and efficiency.
Key Takeaways: Inter-Company Transactions
- Arm’s Length Principle is Mandatory: All transactions between Related Parties and Connected Persons must be priced at market rates, as if they were unrelated.
- Applies to Domestic Transactions: The rules apply equally to transactions between two UAE-based companies (e.g., mainland and Free Zone) as they do to cross-border transactions.
- Documentation is Your Defense: Businesses must maintain comprehensive Transfer Pricing documentation (Master File, Local File) to justify their pricing policies to the FTA.
- Formal Agreements are Essential: All inter-company dealings should be governed by formal, written legal agreements that reflect the economic reality of the transaction.
- Broad Scope: The rules cover all types of transactions, including the sale of goods, provision of services, loans, royalties for intellectual property, and leases.
Part 1: The New Reality – Who Are “Related Parties” and “Connected Persons”?
The first step in managing inter-company dealings is to understand who falls under the new rules. The law casts a wide net, encompassing not just corporate relationships but individual ones as well.
Defining Related Parties
The term “Related Party” primarily refers to entities that have a relationship of control. This includes:
- Two or more legal entities that are part of the same corporate group (e.g., a parent and its subsidiary, or two subsidiaries under a common parent).
- An individual and a legal entity where the individual, alone or with their related parties, owns 50% or more of that entity.
- Two or more legal entities where the same person, alone or with their related parties, owns 50% or more of each entity.
This is a critical area that often requires a detailed due diligence review of the company’s ownership structure.
Defining Connected Persons
The concept of “Connected Persons” is even broader and is primarily aimed at transactions involving individuals who run the business. A Connected Person of a business is:
- The individual who owns the business.
- A director or officer of the business.
- A relative of the owner, director, or officer (up to the fourth degree of kinship, such as great-grandparents or first cousins).
- A Related Party to any of the individuals mentioned above (e.g., another company owned by the director’s spouse).
This means that the salary paid to an owner-manager, a loan provided to a director’s family member, or a service agreement with a company owned by a cousin are all subject to the Arm’s Length Principle.
Part 2: The Arm’s Length Principle – The Unbreakable Rule
The entire framework for managing inter-company transactions is built on this single principle.
The Arm’s Length Principle requires that transactions between Related Parties are conducted on terms and conditions that would have been agreed upon between independent parties in similar circumstances.
Imagine a company that owns a factory (ParentCo) and a distribution company (SubCo). If ParentCo sells its products to SubCo at a very low price, SubCo will show a large profit, while ParentCo shows a small one. If ParentCo is in a higher tax jurisdiction than SubCo, this strategy would artificially shift profits and reduce the group’s overall tax bill. The Arm’s Length Principle prevents this by asking: “What price would ParentCo have charged an independent, third-party distributor for these same products?” That price—the market price—is what must be used for the inter-company transaction. Proving this requires robust financial reporting and economic analysis.
Part 3: Common Types of Inter-Company Transactions to Manage
Businesses must identify and apply the Arm’s Length Principle to a wide array of transactions, including:
- Sale of Goods: The pricing of tangible products transferred between group entities.
- Provision of Services: This is a major area and includes centralized functions like:
- Management and administrative support
- IT and technical services
- HR and payroll services
- Marketing and sales support
- Financial Transactions: Inter-company loans, cash pooling arrangements, and financial guarantees must all carry market-based interest rates and fees.
- Use of Intangible Property: Charging royalties for the use of brand names, patents, or proprietary software. A business valuation may be needed to determine the correct royalty rate.
- Leasing of Assets: Rental charges for the use of property, machinery, or equipment.
Part 4: Justifying Your Price – The Five Transfer Pricing Methods
To prove that a transaction is at arm’s length, the law recognizes five internationally accepted methods. The choice of method depends on the nature of the transaction.
- Comparable Uncontrolled Price (CUP) Method: The most direct method. It compares the price in the inter-company transaction to the price in a comparable transaction between independent parties. Best for commodity-type goods.
- Resale Price Method (RPM): Used for distribution activities. It starts with the price at which the product is sold to a third party and subtracts a gross margin that a comparable independent distributor would earn.
- Cost Plus Method (CPM): Used for manufacturing or service provision. It starts with the supplier’s costs and adds a mark-up that a comparable independent supplier would earn.
- Transactional Net Margin Method (TNMM): A very common method that compares the net profit margin of the tested party (e.g., the distributor or service provider) to the net profit margins of comparable independent companies.
- Profit Split Method: Used for highly integrated and complex transactions where it’s difficult to evaluate them separately. It splits the combined profit from the transaction between the parties based on their relative contributions.
Part 5: The Documentation Mandate
Justifying your inter-company transactions requires formal, detailed documentation. For many businesses, this involves a three-tiered approach.
Tier 1: Transfer Pricing Disclosure Form
This form must be submitted along with the annual Corporate Tax return by any business that has transactions with Related Parties or Connected Persons. It’s a declaration to the FTA about your inter-company activities.
Tier 2 & 3: Master File and Local File
Businesses that meet certain revenue thresholds must prepare and maintain a detailed Master File and Local File.
- Thresholds: This is required if your business is part of a Multinational Group with consolidated revenue over AED 3.15 billion, OR if the UAE business itself has revenues over AED 200 million.
- Master File: Provides a high-level overview of the entire group’s global business, value drivers, and transfer pricing policies.
- Local File: This is the detailed report for the UAE entity itself. It describes the local business, details every material inter-company transaction, and contains the economic analysis (benchmarking studies) that proves the pricing is at arm’s length.
These documents must be ready by the tax filing deadline and submitted to the FTA within 30 days if requested. Preparing them is a complex task that requires expert support and a strong accounting system implementation.
What Excellence Accounting Services (EAS) Can Offer
Managing inter-company transactions under the new tax law is a specialist field. EAS provides end-to-end support to ensure your group is fully compliant and strategically aligned.
- Transfer Pricing Advisory: Our experts, acting as your virtual CFOs, help you design, implement, and monitor robust, arm’s length transfer pricing policies.
- Full Documentation Preparation: We handle the entire process of preparing your Local File and Master File, including conducting economic benchmarking studies to defend your pricing.
- Inter-Company Agreement Drafting: We assist in drafting the necessary legal agreements to formalize your inter-company transactions and ensure they align with your transfer pricing policy.
- Audit and Dispute Resolution: As your registered tax agent, we represent you in case of an FTA audit, defending your transfer pricing documentation and managing all communications. An internal audit can help prepare you for this.
- VAT and CT Integration: We ensure your inter-company transaction strategy is consistent across both your VAT and Corporate Tax filings, avoiding contradictions that could trigger audits.
Frequently Asked Questions (FAQs)
Yes, absolutely. The Arm’s Length Principle applies to all transactions between Related Parties, whether they are cross-border or purely domestic. This includes transactions between a mainland company and a related company in a Free Zone.
This is a major compliance risk. The absence of a formal agreement makes it very difficult to justify the nature and pricing of a transaction to the FTA. It suggests the arrangement is informal and not based on arm’s length principles. It is critical to put legal agreements in place for all inter-company dealings.
Only if you can prove that a 5% mark-up is the market rate. You would need to perform an economic analysis or benchmarking study to show that independent companies providing similar services earn a similar level of profit. You cannot simply assume a rate is acceptable.
As the owner, you are a “Connected Person.” The salary you pay yourself must be at a market rate for the work you do. You cannot pay yourself an artificially high salary to reduce the company’s profit. You should be prepared to justify your salary based on market data for similar roles.
Yes. Transactions between a UAE head office and a foreign branch, or a UAE branch and its foreign head office, are also subject to the Arm’s Length Principle.
The penalties are two-fold. First, there are administrative penalties for failing to submit the Disclosure Form or provide documentation when requested. Second, and more significantly, if the FTA adjusts your pricing, you will be liable for the additional tax on the adjusted income, plus substantial penalties on the underpaid tax.
This is typically done through a “benchmarking study.” This involves using specialized financial databases to find independent companies that perform similar functions and have a similar risk profile. The profit margins earned by these independent companies are then used to establish an arm’s length range of prices or profits for your transaction.
No. While you may not need to prepare the formal Master and Local Files, you are still legally required to comply with the Arm’s Length Principle for all your inter-company transactions and must declare them in the Disclosure Form. You must be able to justify your pricing to the FTA if asked, so some level of supporting documentation is always advisable.
A “Related Party” is primarily about control relationships between entities or between an entity and a major owner (50%+). A “Connected Person” is a broader concept focused on individuals, covering owners (regardless of percentage), directors, and their relatives. Both are subject to the same Arm’s Length Principle.
You should review your pricing policies annually. The economic data from benchmarking studies is typically valid for a limited period (often updated annually or every three years). You must test your results each year to ensure they still fall within the arm’s length range.
Conclusion: From Internal Arrangement to Strategic Policy
The new UAE Corporate Tax Law demands a fundamental shift in how businesses approach inter-company transactions. What was once a matter of internal accounting convenience is now a core area of tax risk and strategy. Proactively mapping, formalizing, justifying, and documenting every inter-company dealing is no longer optional. By embracing this new reality, businesses can not only ensure compliance and avoid costly penalties but also gain greater clarity over their internal value chains, leading to improved operational efficiency and a more robust governance framework for the entire group.
