The introduction of corporate tax in UAE has made transfer pricing, grounded in OECD principles, a key compliance requirement for businesses. Transfer pricing guarantees that transactions between related or affiliated parties are priced appropriately, protecting the integrity of the tax base. At HLB HAMT, we make the complexities of transfer pricing easier to understand by providing practical services that assist businesses in adhering to regulations and optimizing their international operations. Our knowledgeable team offers customized solutions to help you navigate changing policies, so you can concentrate on growth while ensuring compliance with transfer pricing regulations in UAE.
What is Transfer Pricing in UAE?
Transfer pricing involves the guidelines for establishing arm’s length prices for Controlled Transactions, which include, but are not limited to, the exchange of goods, services, loans, and intangible assets. This practice ensures that these transactions are carried out fairly and in accordance with market standards, following OECD principles. The transfer price should reflect an ‘open market’ or ‘arm’s length’ value, thereby preventing companies from adjusting intragroup prices to lower their overall tax liabilities. Such practices help avert profit shifting and protect the integrity of the tax base, particularly considering evolving regulations in regions like the UAE.
Applicability of Transfer Pricing in UAE
Transfer pricing regulations apply to all transactions between related parties and connected individuals, which include:
Cross-Border and Domestic Transactions
These rules cover both cross-border transactions and domestic activities, including those involving entities in free zones.
Government Transactions
Transactions between mandated and non-mandated segments of government entities are also governed by these regulations.
Exempt Entities:
Businesses classified as exempt or those that have opted for small business relief must adhere to arm’s length standards for inter-company transactions. However, exempt entities are not required to prepare or maintain local and master files.
Who Are Related Parties and Connected Persons Under the UAE Corporate Tax Regime?
Related Parties
Under the UAE corporate tax regime, related parties are defined as any individuals or entities associated with a Taxable Person, as specified in Article 35(1) of the Corporate Tax Law. This association indicates a pre-existing relationship with another Person through kinship (for natural persons), ownership, or control, regardless of whether the other Person resides in the UAE or not.
The criteria for identifying related parties include:
Kinship or Affiliation
This encompasses relationships up to the fourth degree of kinship, including those formed through adoption or guardianship. The definition of kinship or affiliation includes the relationship between individuals who are related up to the fourth degree, whether through blood ties, marriage, or other recognized relationships such as guardianship or adoption.
Ownership
A natural person is considered related to a juridical person if they, or their related parties, directly or indirectly own 50% or more of that juridical person. A natural person and a juridical person qualify as Related Parties through ownership when the individual or their related parties hold shares in the juridical person, and together they own or control 50% or more of it.
Control
A person is deemed related if they exercise direct or indirect control over another person. This can include influencing voting rights, the composition of the board, profit distribution, or overall business affairs. Control refers to the power to influence another Person and can be determined in several ways, including:
- Exercising 50% or more of the voting rights in another Person
- Influencing the composition of 50% or more of the board of directors of another Person
- Receiving 50% or more of the profits from another Person
- Directing or significantly influencing the business decisions of another Person
The term “related party” also applies to relationships such as:
- A Person and their Permanent Establishment (PE) or Foreign PE, meaning transfer pricing rules apply to transactions between them.
- Two or more Persons who are partners in the same unincorporated partnership.
- A Person who serves as the trustee, founder, settlor, or beneficiary of a trust or foundation, along with the related parties of the trust or foundation.
Connected Persons
Connected persons are treated differently from related parties under the UAE corporate tax framework. A Person is deemed a Connected Person of a Taxable Person if they meet the following criteria:
- An individual who has an ownership interest in, or control over, a Taxable Person, whether directly or indirectly.
- Directors or officers of the Taxable Person.
- Individuals related to the owner, director, or officer of the Taxable Person up to the fourth degree, including relationships established by birth, marriage, adoption, or guardianship.
- In the case of an unincorporated partnership, other partners in the same partnership are also considered connected.
- Any related party of the individuals mentioned above.
Connected persons are significant in the context of deducting payments or benefits from a Taxable Person, as these are only deductible for Corporate Tax purposes if they conform to the Arm’s Length Price and are incurred exclusively for the business of the Taxable Person.
Controlled Transactions
A “Controlled Transaction” refers to a transaction or arrangement between Related Parties or Connected Persons. These transactions typically include the supply or transfer of tangible goods, the provision and receipt of services, funding and other financial dealings, as well as the commercial exploitation of intangible assets like patents, brands, and know-how.
Under UAE Transfer Pricing rules, all cross-border Controlled Transactions—meaning transactions between a Person and its Related Parties or Connected Persons situated in different tax jurisdictions—as well as domestic Controlled Transactions, which involve Related Parties or Connected Persons located within the UAE—including transactions between Free Zone Persons—must adhere to the Arm’s Length Principle.
Arm’s Length Principle in the UAE
The Arm’s Length Principle (ALP), established in the UAE under Article 34 of the Corporate Tax Law, requires that the pricing for transactions between related parties or connected persons should reflect the prices agreed upon by independent entities in similar circumstances.
This principle ensures fair profit allocation and compliance with transfer pricing rules, which are essential for both domestic and international transactions. Companies are expected to use one of several internationally recognized methodologies for determining arm’s length prices, following the OECD Transfer Pricing Guidelines. If standard methods are impractical, alternative approaches may be considered justified.
Arm’s Length Price: The price set for a specific business transaction according to the Arm’s Length Principle.
Application of the Arm’s Length Principle
Identify Related Parties and Transactions
Determine the related parties, connected persons, and relevant transactions, and conduct a comparability analysis.
Select the Appropriate Transfer Pricing Method
Choose the most suitable method for transfer pricing.
Determine the Arm’s Length Price
Establish what the arm’s length price should be for the transaction.
Transfer Pricing Services for Foreign Companies Operating in UAE
As per FTA’s Transfer Pricing Guide 2023, foreign companies operating in the UAE are also required to follow new regulations, and have to conduct transactions as if they were between independent entities. At HLB HAMT, our transfer pricing service aligns with UAE benchmarks, ensuring compliance with the latest regulations for international firms as per the TP guide. As we prioritise accuracy in all transactions between related companies, complete compliance with the new policies are ensured for transactions outside the country as well.
Transfer Pricing Methods in UAE
Determining a fair price for transactions between related companies can be achieved through various transfer pricing methods. The OECD provides several methods to choose from:
Traditional Transaction Methods
Comparable Uncontrolled Price (CUP) Method
This method examines the price charged in similar transactions between unrelated parties. When using the CUP method, the Controlled Transaction can be compared to either an internal or external Comparable Uncontrolled Transaction, depending on the situation:
- Internal CUP: The price of a similar transaction between related parties and a third party.
- External CUP: The price of a similar transaction between two or more unrelated parties.
Resale Price Method
This method bases the transfer price on the price at which a product purchased from a related party is sold to an independent party.
Cost Plus Method (CPM)
This method takes into account the direct and indirect costs incurred by a supplier in providing goods or services during a Controlled Transaction and adds an appropriate mark-up. The mark-up is determined based on the functions performed by the supplier and the profit that would typically be earned from an arm’s length transaction under market conditions:
- Internal Comparable: Here, the cost-plus mark-up of the supplier in the Controlled Transaction is based on the mark-up that the same supplier earns in a similar transaction with an independent party.
- External Comparable: In this case, the cost-plus mark-up of the supplier is based on what would have been earned in comparable transactions between two independent parties.
Transactional Profit Methods
Transactional Profit Split Method
This approach aims to determine how profits should be divided based on what independent parties would expect to earn from similar transactions.
Transactional Net Margin Method
This method compares the net profit margin of a controlled transaction to that of similar uncontrolled transactions.
Choosing the right method requires consideration of factors such as data availability, the strengths and weaknesses of each method, and how well each method aligns with the nature of your transactions. Once you select the most suitable method and identify reliable comparisons, you can establish a fair price range.
In certain situations, alternative methods not approved by the OECD may be used, provided you can demonstrate that your chosen method reliably measures an arm’s length price and complies with UAE corporate tax law.
Functional Analysis
In dealings between two independent parties, the compensation typically reflects the functions performed by each entity, the assets utilized, and the risks undertaken. This same principle must be applied to transactions between Related Parties or Connected Persons. Therefore, conducting a thorough Functional Analysis of the Controlled Transaction is essential as part of a comparability analysis. This helps to clearly define the transaction and assess its comparability with uncontrolled transactions.
To accurately delineate the actual transaction concerning the associated risks, there is a six-step process for analyzing the risks in a Controlled Transaction. This process can be summarized as follows:
Before outlining this six-step process, it is important to define and understand the following terms:
Risk Management
This refers to the process of evaluating and addressing the risks related to a commercial activity.
Financial Capacity to Assume Risk
This can be understood as having the necessary capital or funding to take on risks, transfer risks, finance risk mitigation efforts, and manage the consequences if the risk actually occurs.
Control Over Risk
This encompasses the first two aspects of risk management: (i) the ability to make decisions about accepting, transferring, or rejecting a risk-bearing opportunity, along with the actual execution of those decisions; and (ii) the ability to decide on the appropriate response to the risks associated with that opportunity, along with the implementation of those decisions.
The Comprehensive Transfer Pricing Services from HLB HAMT
Transfer Pricing Assessment
A transfer pricing assessment acts as a transaction identifier, evaluating each transaction to ensure compliance with the arm’s length principle. This crucial step helps businesses maintain transparency and integrity in their financial activities while ensuring effective tax compliance aligned with international standards. Additionally, it enables companies in the UAE to proactively address potential issues and refine their pricing strategies, reducing the chances of disputes with tax authorities in the future.
Transfer Pricing Impact Assessment
A transfer pricing impact assessment helps businesses understand how new transfer pricing rules will affect their finances and operations. Here’s our approach:
- Identifying Related Party Transactions: We identify significant transactions between related companies and outline the necessary steps for compliance with UAE transfer pricing regulations.
- Evaluating Effects: We analyze both the financial and operational impacts of the new rules to help your business prepare for any changes.
- Finding Risks and Opportunities: Our team identifies necessary adjustments to build a stronger, more efficient transfer pricing model that meets regulations while capitalizing on growth potential.
UAE Transfer Pricing Documentation Requirements
Transfer Pricing Disclosure Form
The transfer pricing disclosure form provides details of Controlled Transactions during a Tax Period. Under Article 55(1) of the Corporate Tax Law, all taxable entities engaging in transactions with related parties or connected persons above a specified materiality threshold must submit this form along with their corporate tax return, as required by the Federal Tax Authority (FTA) for compliance.
- Mandatory Reporting: If aggregate related-party transactions exceed AED 40 million, or if the value in any category exceeds AED 4 million, these must be reported.
- Connected Person Disclosure: Transactions exceeding AED 500,000 per connected person must be disclosed.
The form, included with the corporate tax return, summarizes controlled transactions for the financial year.
Local & Master File
In the UAE, companies that are part of a multinational enterprise (MNE) group with consolidated revenues exceeding AED 3,150,000,000, or with individual revenues above AED 200,000,000, are required to prepare both a Local File and a Master File.
Local File
The local file is a type of transfer pricing documentation that provides detailed information about specific controlled transactions during the relevant tax period. It includes data on intercompany transactions, details of related parties, applicable transfer pricing methods, and a thorough analysis demonstrating compliance with the arm’s length principle. This document is vital for maintaining transparency and must be presented to the UAE tax authorities upon request.
Master File
The master file offers an overview of the entire MNE group’s global operations, covering policies and procedures related to transfer pricing. This document includes high-level information about the business structure, key value drivers, and the allocation of income and economic activity. Together, these files ensure compliance with regulations and facilitate effective monitoring of transfer pricing practices across different jurisdictions.
Country-by-Country Report:
This CBCR report provides a global overview of the MNE group’s income and taxes paid, including indicators of the location of economic activity within the group. Additional supporting information may be requested by the FTA, as per Article 55(4) of the Corporate Tax Law.
Benchmarking
Benchmarking in transfer pricing involves comparing the pricing of a company’s intercompany transactions with similar transactions between independent entities under comparable conditions. The primary goal of a benchmarking study is to determine the general conditions associated with transactions performed by third parties in the given market. Conducting a benchmarking study helps establish a range of values, such as the arm’s length range or mark-up range.
This process is essential for determining if a company’s transfer prices comply with the arm’s length principle, thereby ensuring fair pricing practices. At HLB HAMT, we utilize globally recognized benchmarking software to provide accurate and comprehensive benchmarking services. Our advanced tools enable us to collect and analyze extensive data on comparable transactions, allowing us to assess and validate your pricing strategies effectively.
Pillar Two Impact Analysis
At HLB HAMT, we are dedicated to guiding businesses through the complexities of the Domestic Minimum Top-Up Tax (DMTT) and Pillar Two compliance. Starting January 2025, these changes will require Multinational Enterprises (MNEs) with global revenues of €750 million or more to maintain a minimum effective tax rate of 15% on profits earned in the UAE. Here’s how we can assist:
Readiness Assessment
Evaluate your eligibility, effective tax rates, and compliance status under Pillar Two.
Strategic Tax Planning
Optimize your tax structures and align transfer pricing policies with global standards.
Compliance Support
Prepare and update transfer pricing documentation, ensuring you are ready for Federal Tax Authority (FTA) reviews.
GloBE Solutions
Leverage advanced tools for accurate Global Anti-Base Erosion (GloBE) compliance and reporting.
Advocacy
Represent your business in discussions with the FTA and assist you in securing Advance Pricing Agreements (APAs).
Ongoing Support
Provide updates, training, and customized advice to help you adapt to policy changes.
Get Assistance from HLB HAMT!
Ensure your transfer pricing services comply with the latest UAE regulations by working with our top experts. Contact us today!
What is Transfer Pricing?
Transfer pricing refers to the rules used to set fair prices for transactions between related companies. These transactions can include the buying or selling of goods, services, loans, and intangible assets. This approach ensures that these transactions are fair and align with market standards, following guidelines from the OECD.
Who does the Transfer Pricing Rules Apply to in the UAE?
Transfer pricing rules apply to transactions between related parties and connected people. This includes transactions that happen across borders as well as those within the UAE, and it also covers government transactions and exempt entities.
What is a Controlled Transaction?
A “Controlled Transaction” is a deal or arrangement between Related Parties or Connected Persons. This typically involves the transfer of physical goods, provision and receiving of services, funding, financial transactions, and the use of intangible assets like patents and brands.
What is the Arm’s Length Principle?
The Arm’s Length Principle (ALP) is a rule used in the UAE that states the prices for transactions between related parties should reflect what independent companies would charge in similar situations. This principle is important for fair profit sharing and following transfer pricing rules, whether in local or international dealings.
What are the main transfer pricing methods used to find fair prices for transactions between related companies?
Comparable Uncontrolled Price (CUP) Method
Resale Price Method
Cost Plus Method (CPM)
Transactional Profit Split Method
Transactional Net Margin Method
Other methods
What is Transfer Pricing Documentation and its Requirements?
Transfer pricing documentation includes important records that multinational companies create to support their pricing strategies. This documentation is necessary for meeting tax regulations and showing that their prices are fair. Key documents include the Transfer Pricing Disclosure Form, Master File, Local File, Country-by-Country Report, and any additional information the Federal Tax Authority (FTA) may require.
What is an Advance Pricing Agreement (APA)?
An Advance Pricing Agreement (APA) is a formal agreement between a taxpayer and a tax authority that sets out the transfer pricing method for transactions over a specific time period, based on certain conditions being met.
What is Transfer Pricing Litigation?
Transfer pricing litigation involves disputes between companies and tax authorities about the pricing of transactions between related companies. These issues usually arise when tax authorities think the pricing doesn’t follow the arm’s length principle. This process can include negotiations, appeals, or legal proceedings where both sides present their cases to ensure compliance.
What is Transfer Pricing Due Diligence?
Transfer Pricing Due Diligence (TPDD) is a process that helps multinational companies identify and address any transfer pricing risks related to a target company.
Why is Transfer Pricing important for the UAE?
With the recent introduction of corporate tax in UAE, the business-friendly and tax-friendly environment is changing. Transfer pricing regulations are now mandatory, which means it’s important for companies to follow these rules. Complying with transfer pricing standards is crucial for ensuring fair pricing of intercompany transactions and avoiding tax disputes.