Transfer Pricing Regulations in the UAE: A Strategic Overview

Transfer Pricing Regulations in the UAE: A Strategic Overview

As the UAE establishes its position as a globally competitive business environment, the introduction of Corporate Tax under Federal Decree-Law No. 47 of 2022 brings Transfer Pricing (TP) into sharper focus. ALWAHAT ACCOUNTS AND INTERNAL AUDIT SERVICES offers insights into the UAE’s TP framework, ensuring businesses stay aligned with compliance obligations while maintaining operational integrity.

Why Transfer Pricing Matters

Transfer Pricing regulations are designed to ensure that transactions between related parties and connected persons are conducted at arm’s length—that is, priced as they would be between independent entities under similar circumstances. This principle helps prevent profit shifting, where companies may attempt to move income to jurisdictions with lower tax rates. The UAE’s TP rules apply to both domestic and cross-border transactions, reinforcing the country's commitment to international tax standards and transparency.

Arm’s Length Principle: The Core of Transfer Pricing

At the heart of the UAE’s TP framework is the arm’s length principle. When a taxable entity engages in transactions with related parties or connected persons, those transactions must be evaluated and priced as if they were conducted with an unrelated third party. This requirement ensures fairness in tax reporting and prevents the artificial reduction of taxable income.

Defining Related Parties and Connected Persons

The Corporate Tax Law outlines specific criteria for identifying Related Parties and Connected Persons. According to Article 35, Related Parties include individuals connected by kinship, adoption, or guardianship up to the fourth degree, as well as entities under common control or ownership of 50% or more. This also extends to a person and their permanent establishment, partners in unincorporated partnerships, and individuals involved in trusts or foundations.

On the other hand, Article 36 defines Connected Persons as owners, directors, or officers of a business, along with their related parties. In unincorporated partnerships, all other partners and their related persons also fall under this category.

Understanding the Concept of Control

The term “control” is critical when assessing relationships under TP rules. It refers to the power to direct or influence another entity’s decisions and operations. This control could be through ownership of voting rights, the ability to appoint the majority of board members, entitlement to more than 50% of profits, or significant influence over the strategic or financial decisions of a business.

Deductibility of Payments to Connected Persons

Under Article 37, any payments or benefits made by a taxable person to a Connected Person must reflect the market value of the service or consideration provided. Moreover, such transactions must be incurred wholly and exclusively for business purposes to be tax deductible. This ensures that business expenses claimed for tax purposes are genuine and not influenced by personal or internal relationships.

Adjustment of Transfer Prices

In instances where transactions between Related Parties do not meet the arm’s length standard, the Federal Tax Authority (FTA) is authorized to adjust the taxable income accordingly. These adjustments bring the reported income in line with what would have resulted had the transaction been conducted independently.

Furthermore, if a foreign tax authority makes a TP adjustment after a UAE Corporate Tax Return is filed, businesses are allowed to seek a corresponding adjustment in the UAE. This is supported under Article 34(11), helping avoid double taxation and ensuring consistency across jurisdictions.

Transfer Pricing Methods: Determining Fair Value

To determine whether a transaction complies with the arm’s length standard, the law outlines several globally recognized TP methods. These include:

• Comparable Uncontrolled Price (CUP) Method

• Resale Price Method

• Cost-Plus Method

• Transactional Net Margin Method

• Profit Split Method

The choice of method depends on the nature and complexity of the transaction, and in some cases, a combination may be used to determine the most accurate result.

Transfer Pricing Documentation: Master File and Local File

Comprehensive documentation is a cornerstone of TP compliance. As per Article 55, taxable persons must maintain detailed records that justify their pricing approach in transactions involving Related Parties and Connected Persons. This includes the preparation of two essential documents:

• The Master File, which provides a high-level overview of the global business structure, operations, and transfer pricing policies.

• The Local File, which contains detailed information about UAE-specific transactions and financial data.

When is Documentation Mandatory?

The obligation to prepare and maintain a Master File and Local File arises under the following conditions:

• The taxpayer's revenue for the tax year is AED 200 million or more, or

• The taxpayer is part of a multinational enterprise (MNE) group with a total consolidated revenue of AED 3.15 billion or more in the preceding fiscal year.

Disclosure Requirements in Tax Returns

To enhance transparency, specific disclosures must be made in the Corporate Tax Return:

• If total transactions with Related Parties exceed AED 40 million, and any single transaction category (e.g., goods, services, IP) exceeds AED 4 million, this must be declared in the Related Party Transaction Schedule.

• Payments or benefits provided to a Connected Person that exceed AED 500,000 per individual (including their related parties) must be disclosed in the Connected Person Schedule.

Partnering for Compliance and Assurance

Transfer Pricing compliance is both a regulatory requirement and a strategic necessity. At ALWAHAT ACCOUNTS AND INTERNAL AUDIT SERVICES, we support businesses with expert guidance, documentation assistance, and regulatory updates to ensure full alignment with UAE TP laws. Whether you are a local entity or part of an international group, our advisors are equipped to help you navigate the complexities of Transfer Pricing with confidence.

Book a free consultation with our team today to discuss your Transfer Pricing obligations and ensure your business is fully prepared.

Disclaimer: The information shared in this article is intended for general understanding and does not constitute professional tax advice. For tailored solutions, consult with a qualified tax professional.