The UAE introduces transfer pricing rules
19 January 2023
Tax Messenger
Tax Messenger
On 9 December 2022, Federal Decree-Law No. 47/2022 on the Taxation of Corporations and Businesses ("the Corporate Tax Law" / "the Law") was published on the official website of the Ministry of Finance of the UAE. Besides providing a legislative framework for the introduction of a corporate tax in the UAE, the Law also introduces federal transfer pricing rules.
The provisions of the Corporate Tax Law apply to tax periods commencing on or after 1 June 2023. The Law entered into force on 24 December 2022.
Below we provide a brief summary of the new transfer pricing rules (Chapter 10 and Article 53 of Chapter 17 of the Law), which are broadly in line with the basic international transfer pricing principles laid down in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by the Organisation for Economic Co-operation and Development ("the OECD Guidelines").
The provisions of the Corporate Tax Law apply to tax periods commencing on or after 1 June 2023. The Law entered into force on 24 December 2022.
Below we provide a brief summary of the new transfer pricing rules (Chapter 10 and Article 53 of Chapter 17 of the Law), which are broadly in line with the basic international transfer pricing principles laid down in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by the Organisation for Economic Co-operation and Development ("the OECD Guidelines").
For the purposes of determining the corporate tax base, transactions between related parties must be concluded on free market terms in accordance with the "arm's length" principle.
Likewise, any payments in monetary or other form made by a taxpayer to connected persons are deductible only if they were made on a free market basis (at market value) and were incurred wholly and exclusively for the purposes of the taxpayer’s business.
Likewise, any payments in monetary or other form made by a taxpayer to connected persons are deductible only if they were made on a free market basis (at market value) and were incurred wholly and exclusively for the purposes of the taxpayer’s business.
Generally speaking, relatedness in the UAE is denoted by an ownership interest of 50% or more in a legal entity.
Specifically, Article 35 of the Law defines related parties as follows:
The definition of "connected persons" is different from that of "related parties". Connected persons include owners of a company (individuals), directors or officers of a company and related parties of owners, directors or officers of a company.
Specifically, Article 35 of the Law defines related parties as follows:
- natural persons who are related to each other up to the fourth degree of kinship (including by way of adoption or guardianship),
- a natural person and a juridical person where (1) the natural person (alone or together with related parties) holds an ownership interest of not less than 50% in the juridical person, or (2) the natural person (alone or together with related parties) directly or indirectly controls the juridical person,
- juridical persons where (1) one juridical person (alone or together with its related parties) holds an ownership interest of not less than 50% in another juridical person, or (2) one juridical person (alone or together with its related parties) directly or indirectly controls another juridical person, or (3) one person (alone or together with its related parties) directly or indirectly holds an ownership interest of not less than 50% in or controls two or more juridical persons,
- a person and its permanent establishment,
- partners within a joint unincorporated partnership,
- persons who are trustees, settlors or beneficiaries of a trust or foundation and their related parties.
The definition of "connected persons" is different from that of "related parties". Connected persons include owners of a company (individuals), directors or officers of a company and related parties of owners, directors or officers of a company.
The transfer pricing rules cover all transactions concluded by persons in the UAE with related parties or connected persons, regardless of whether the related parties or connected persons are registered on the UAE mainland, in a free zone or in a foreign jurisdiction.
In the case of transactions occurring within the UAE, companies may be exempted from the requirements of the transfer pricing rules if those companies form a so-called tax group (i.e., if the companies apply to form a tax group and are treated as a single payer in the UAE). This option is available to companies with a parent company in the UAE which directly or indirectly owns at least 95% of each company in the tax group.
In the case of transactions occurring within the UAE, companies may be exempted from the requirements of the transfer pricing rules if those companies form a so-called tax group (i.e., if the companies apply to form a tax group and are treated as a single payer in the UAE). This option is available to companies with a parent company in the UAE which directly or indirectly owns at least 95% of each company in the tax group.
The Law (clause 3 of Article 34) prescribes 5 standard transfer pricing methods for determining the market level of transaction prices (it is also permissible to use a combination of these methods):
The method or combination of methods to be used is the one that provides the most reliable determination of the market level of prices ("the most reliable transfer pricing method") based on the terms and characteristics of the transaction in question, the economic circumstances in which it takes place, and the functions, risks, assets and business strategies of the parties to the transaction.
At the same time, taxpayers have the option of using a different transfer pricing method if none of those listed above can reasonably be used.
- The comparable uncontrolled price method
- The resale price method
- The cost-plus method
- The transactional net margin method
- The profit split method
The method or combination of methods to be used is the one that provides the most reliable determination of the market level of prices ("the most reliable transfer pricing method") based on the terms and characteristics of the transaction in question, the economic circumstances in which it takes place, and the functions, risks, assets and business strategies of the parties to the transaction.
At the same time, taxpayers have the option of using a different transfer pricing method if none of those listed above can reasonably be used.
If the tax authorities make an adjustment to the tax base owing to the fact that the actual results of a transaction do not fall within the market range, they must use information that is or can be made available to the taxpayer.
If the tax authorities make an adjustment to the tax base owing to the fact that the actual results of a transaction do not fall within the market range, they must make a corresponding adjustment to the tax base of the other party to the transaction.
The tax period is the calendar year (from 1 January to 31 December). Where a company’s financial year differs from the calendar year, the tax period will be that financial year.
For transfer pricing and corporate tax purposes, companies whose financial year begins, for example, on 1 July 2023, will be subject to the requirements of the Law from 1 July 2023; companies whose financial year begins on 1 January 2023 will be subject to the requirements of the Law from 1 January 2024.
For transfer pricing and corporate tax purposes, companies whose financial year begins, for example, on 1 July 2023, will be subject to the requirements of the Law from 1 July 2023; companies whose financial year begins on 1 January 2023 will be subject to the requirements of the Law from 1 January 2024.
Transfer pricing documentation in the UAE is to be filed only at the request of a tax authority either 1) together with a corporate tax return or 2) separately.
Companies whose total revenue for a financial year falls below a certain threshold [that threshold has not yet been defined — B1] may apply for exemption from corporate tax ("small business relief") (Article 21 of the Law), in which case it will not be subject to requirements to prepare transfer pricing documentation.
- Filing together with a tax return: at the request of a tax authority, taxpayers must submit together with their corporate tax return information on transactions with related parties and connected persons in the form prescribed by the tax authority. The tax return and accompanying information must be submitted no later than 9 (nine) months after the end of the relevant tax period.
- Separate filing: where a taxpayer’s controlled transactions for a tax period meet certain conditions [those conditions have not yet been defined — B1], the taxpayer must prepare a master file and a local file in the form prescribed by the tax authority. In this case, the master file, local file and any other information supporting the arm’s length nature of controlled transactions must be provided within 30 (thirty) days after the tax authority’s request.
Companies whose total revenue for a financial year falls below a certain threshold [that threshold has not yet been defined — B1] may apply for exemption from corporate tax ("small business relief") (Article 21 of the Law), in which case it will not be subject to requirements to prepare transfer pricing documentation.
Conclusions
The Law is lacking in detail on certain issues, such as:
Until the publication of relevant guidance or clarifications on the provisions of the Law or other UAE laws and regulations, it is advisable to rely on the OECD Transfer Pricing Guidelines, since the UAE is a member of the OECD Inclusive Framework on the Implementation of the BEPS Plan[1] and is highly likely to continue developing its local transfer pricing rules in line with the OECD Guidelines.
The Law is lacking in detail on certain issues, such as:
- The structure of the content of transfer pricing documentation, including master files and local files,
- The financial threshold for treating transactions with related parties and connected persons as controlled,
- Requirements relating to the strategy for conducting an economic analysis for the purpose of calculating the market range of prices/profit margins
- Requirements as to how often transfer pricing documentation must be updated, et al.
Until the publication of relevant guidance or clarifications on the provisions of the Law or other UAE laws and regulations, it is advisable to rely on the OECD Transfer Pricing Guidelines, since the UAE is a member of the OECD Inclusive Framework on the Implementation of the BEPS Plan[1] and is highly likely to continue developing its local transfer pricing rules in line with the OECD Guidelines.
How B1 can help:
In light of the new transfer pricing rules in the UAE, B1 is ready to provide prompt support in:
In light of the new transfer pricing rules in the UAE, B1 is ready to provide prompt support in:
- analysing current transactions involving UAE companies and identifying and assessing transfer pricing risks
- developing and implementing transfer pricing policies and models with the involvement of UAE companies
- preparing templates of transfer pricing documentation, including master files and local files
- carrying out benchmarking studies of prices / profit margins in relation to transactions with UAE residents
- transfer pricing advice and planning for new transactions involving UAE companies.
[1] The Action Plan on Base Erosion and Profit Shifting
Authors:
- Ruslan RadzhabovPartnerTransfer Pricing and Operating Model Effectiveness
- Vasilii AnishchenkoAssociate PartnerTransfer Pricing and Operating Model Effectiveness
- Ekaterina SyrnikovaSenior ManagerInternational Tax and Transaction Services
- Olga LapitskayaSeniorInternational Tax and Transaction Services
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