UAE introduces new transfer pricing rules
The Ministry of Finance of the United Arab Emirates (UAE) has released a new Corporate Tax Law. This law enacts transfer pricing rules and documentation requirements to ensure that the pricing of transactions between related parties or connected persons. The Corporate Tax Law will be effective for financial years starting on or after 1 June 2023.
Arm’s length principle
The new transfer pricing UAE rules state that transactions with a related party should meet the arm’s length principle. To determine the arm’s length prices, standard OECD transfer pricing methods can be used:
- Comparable Uncontrolled Price method
- Resale Price method
- Cost-Plus method
- Profit Split method
- Transactional Net Margin method
Related parties and connected persons explained
The Corporate Tax law contains different rules in relation to the OECD to determine if a party is considered a related party. Those rules are summarized below:
- Natural persons who are related up to the fourth degree of kinship or affiliation, including by birth, marriage, adoption, or guardianship.
- An individual and a legal entity where alone, or together with a related party, the individual directly or indirectly owns a 50% or greater share in, or controls, the legal entity.
- Two or more legal entities where one legal entity alone, or together with a related party, directly or indirectly owns a 50% or greater share in, or controls, the other legal entity.
- Two or more legal entities if a taxpayer alone, or with a related party, directly or indirectly owns a 50% share of each or controls them.
- A taxpayer and its branch or permanent establishment.
- Partners in the same unincorporated partnership exempt and non-exempt business activities of the same person.
According to the Corporate Tax Law a person will be considered as a connected person if this person is:
- An individual who directly or indirectly has an ownership interest in, or controls, the taxable person.
- A director or officer of the taxable person.
- An individual related to the owner, director or officer of the taxable person to the fourth degree of kinship or affiliation, including by birth, marriage, adoption or guardianship.
- Where the taxable person is a partner in an unincorporated partnership any other partner in the same partnership.
- A related party of any of the above.
By Ministerial Decision the requirements for maintaining transfer pricing documentation are issued. This decision has specified instances where taxpayers must maintain transfer pricing documentation, specifically a master file and a local file. If a taxpayer has a revenue of at least AED 200 million (approximately € 50 million) in a relevant tax period or if the taxpayer is part of a MNE group with a total consolidated group revenue of at least AED 3.15 billion (approximately € 800 million) in the relevant tax period. If requested by the FTA, the transfer pricing documentation must be submitted within 30 days following the request.
Guidelines for maintaining transfer pricing documentations are not available yet, but should be issued by the Authority soon. Based on previously disclosed information by the Ministry of Finance, these guidelines are expected to be (broadly) aligned with OECD standards.
Companies that qualify as a QFZP (Qualifying Free Zone Persons) are eligible to benefit from a 0% Corporate Tax rate on its qualifying income. This does not mean transfer pricing is not required. A QFZP is also required to price its transactions at arm’s length and maintain appropriate transfer pricing documentation.
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