The United Arab Emirates (UAE) transfer pricing (TP) rules largely follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (The OECD TP guidelines). Currently, the national TP legal framework is governed by the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, commonly referred to as the Corporate Tax Law (CIT). The authority managing the transfer pricing policies is the Federal Tax Authority.
Furthermore, the UAE Federal Tax Authority released a detailed Transfer Pricing Guide on 23rd October 2023, which aligns with the OECD Transfer Pricing Guidelines, providing businesses with information on compliance requirements, acceptable approaches, and documentation requirements.
Arm’s Length Principle
The Arm’s Length Principle is stipulated in Article 34 of the Corporate Tax Law, which aims to aims to price the transactions between Related Parties or Connected Persons as if such transactions are made between independent parties under the same circumstances. That principle demands that settlements represent market prices, such that prices will be transferable to other entities, domestic or cross-border.
Related Party Definition
In the UAE, Related Parties are defined under Article 35 of the Corporate Tax Law as entities associated with a Taxable Person through a specific degree of association, which can be based on kinship, ownership, or control, regardless of whether the other person is a UAE resident or not.
Ownership and control are determined by the requirement for a person or a group of related individuals to own 50% or more of a company or to have significant control over its decisions, they are considered related to that entity. The same applies when one company owns or controls at least 50% of another. This includes both direct and indirect ownership, meaning that if control is exercised through multiple connected entities, the relationship is still classified as related.
Transfer Pricing Methods
The UAE follows five internationally recognized transfer pricing methods as outlined in the OECD Transfer Pricing Guidelines and incorporated under Article 34(3) of the Corporate Tax Law, as follows:
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
CIT Law follows OECD TP Guidelines to determine the most appropriate transfer pricing method, but also allows taxpayers to use an alternative approach if they can demonstrate that none of the above methods can reasonably be applied to achieve an arm’s length result. However, any alternative method must still comply with the arm’s length principle to guarantee fair and transparent pricing in related-party transactions.
Comparability Analysis
A comparability analysis compares Controlled Transactions (between related parties) with Comparable Uncontrolled Transactions (between independent parties) to determine if conditions differ. According to the CIT law, a transaction is comparable if there are no material differences between controlled and uncontrolled transactions or if such differences can be adjusted to provide an arm’s length outcome.
To determine comparability, the law requires an examination of some key factors which are such as the type of transaction, activities undertaken, property employed, risks borne by each party, and contractual terms and economic terms. Commercial methods used by the parties also enter the fray to ensure prices of genuine commercial behavior.
Documentation Requirements
According to Article 55 of the CIT Law, TP documentation requirements in the UAE are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the UAE tax authority:
- Master File;
- Local File, and
- Country-by-Country (CbC) Report.
Master and Local File
The Master File and Local File requirements are compulsory for businesses with a turnover of not less than 200 million dirhams annually or business groups that are part of a Multinational Enterprise (MNE) whose consolidated revenue exceeds 3.15 billion dirhams. The files must be submitted to the Federal Tax Authority (FTA) within 30 days upon request.
The Master File provides a global overview of the MNE group and is structured in five main sections: the organizational structure, description of the business of the group, details on intangibles, overview of cross-company financial transactions, and financial and tax position of the group. The file ensures that the tax authorities understand how the company operates on a global basis.
The Local File, on the other hand, addresses the UAE entity and presents a detailed segmentation of its related-party transactions. It includes information on the local business, functional analysis of its significant controlled transactions, the applied transfer pricing method, and the underlying financial information that supports adherence to the arm’s length principle.
Country-by-Country Reporting
In the UAE, Country-by-Country Reporting (CbCR) is required for multinational groups with revenue over AED 3.15 billion. The reporting obligation falls on the Ultimate Parent Entity, which must do so within 12 months of the end of the fiscal year.
The CbC report has to contain consolidated financial and operational information for each country in which the MNE has operations. The revenue, profit or loss before tax, paid and accrued income tax, stated capital, accumulated earnings, number of employees, and tangible assets (excluding cash and cash equivalents) are to be included. In addition, the report must identify all constituent entities (CEs) of the MNE group, their tax residence jurisdiction, the legal jurisdiction in which they are organized (if other), and their main business activities.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
The UAE until 2024 did not provision the APA procedure in resolving disputes. However, with Federal Tax Authority Decision No. 4 of 2024, the CIT law now gives a person the option to apply for an advance pricing agreement covering either existing or proposed transactions. Detailed guidance is expected to be provided soon.
Regarding the Mutual Agreement Procedure (MAP), the UAE includes transfer pricing issues and anti-abuse provisions. Taxpayers can request MAP help even after using other legal remedies, with a three-year window to file a request. The MAP process can take up to three years, and no fees are charged. However, there’s no specific process for resolving cases involving penalties or interest. The UAE is open to multilateral MAPs when needed.
Approach to Transfer Pricing Audits
The responsible authority to conduct the TP audits is the Federal Tax Authority, which conducts its activity in accordance with the CIT Law and other related acts on transfer pricing.
Penalties
The penalty for not submitting a notification or report on time is 1 million dirhams, with an additional 10,000 dirhams per day for continued failure, up to a maximum of 250,000 dirhams. If a company submits incomplete or inaccurate information, penalties range from 50,000 dirhams to 500,000 dirhams, reinforcing the UAE’s strict approach to transfer pricing compliance and tax transparency.
Taxation at a Glance
The United Arab Emirates is composed of seven Emirates: Abu Dhabi, Dubai, Sharjah, Ras Al Khaimah, Umm Al Quwain, Fujairah, and Ajman. Regarding the taxation policies, each Emirate enjoys partial independence. The central government’s budget is partly funded by a share of each Emirate’s revenue. Most Emirates have their own income tax rules, and in 2022, a federal corporate income tax was introduced, which applies to most businesses starting June 1, 2023.
The official name of the UAE tax authority is Federal Tax Authority.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 20% to 55% |
VAT | 5% |
Withholding tax on dividends to non-residents | 0% |
Withholding tax on interest to non-residents | 0% |
Withholding tax on royalties to non-residents | 0% |
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