Introduction

For organizations in the UAE, it is important to be able to demonstrate compliance with the way they conduct transactions with related parties. As such, the related party transactions where the organizations offer services, loan money to the shareholders, and trade products between each other must satisfy certain requirements in relation to the tax treatment.

In accordance with the Transfer Pricing Rules in the UAE, any transactions conducted by the related parties should be at prices which would be acceptable to the unrelated parties under the same conditions, meaning the arm’s length principle.

In relation to the UAE Corporate Tax, the organizations will need to prepare documentation, make disclosures and reveal some of the details regarding their transactions and corporate groups.

It is important to be aware of all the criteria to ensure that the related party transactions are properly justified.

The article below gives an overview of the UAE transfer pricing regime, documentation, disclosures and other issues.

What Are UAE Transfer Pricing Rules?

Transfer pricing involves setting prices on transactions between related parties and connected persons, which could be sales of goods, services, finance operations, intellectual property, and other dealings.

The transfer pricing policy under UAE Corporate Tax Law is based on the arm’s length standard.

According to the arm’s length standard, the terms and prices of a transaction between the parties must be the same as if they were set between independent businesses in the similar situation.

For instance, if a company in the UAE offers management services to another company which belongs to the same parent group, and the fee for these services is substantially higher or lower than the commercial price on the market, then the transaction will draw the attention of the Federal Tax Authority (FTA).

Who Is Required to Follow UAE Transfer Pricing Rules?

UAE transfer pricing requirements apply to taxable persons conducting transactions with related parties or connected persons.

These may include:

• Entities that operate under the same corporate group.
• Entities that have common ownership or similar structure.
• Entities that are managed by the same person or entity.
• Transaction between directors, shareholders, and other related parties.
• Entities that conduct business with related parties situated outside the UAE.

Importantly, transfer pricing rules can apply to both domestic and cross-border transactions.

Even if two related companies operate within the UAE, their transactions must satisfy the arm’s length principle.

What Are Related Party Transactions in the UAE?

Related-party transactions are commercial or financial dealings between individuals or entities that have a relationship involving ownership, control, or common influence.

Common examples include:

• Transaction in the form of sale/purchase of merchandise between companies of the same group.
• Management/consultation service charges.
• Finance/lending arrangements between related companies.
• Royalty fees for trademarks, patents or any other intellectual property.
• Rental charges between related companies.
• Shared costs of administration and operations.

Businesses should identify these transactions carefully because their pricing and contractual terms may affect taxable profits.

Key UAE Transfer Pricing Documentation Requirements

Proper record keeping is one of the crucial elements of Transfer Pricing Documentation UAE. Documentation requirement will be determined based on the situation of the organization and the transaction amounts involved.

1. Transfer Pricing Disclosure Form

UAE Transfer Pricing Disclosure Form is one of the documents that should be filed in the Corporate Tax return filing process provided certain criteria are met by the business entity.

It involves information pertaining to transactions and arrangements with related and connected parties.

According to the requirements, businesses are required to disclose the following:

• Related party transaction types.
• Values of transactions in the tax period.
• Details about related parties.
• Connected person transactions and remunerations.
• Transfer pricing methodologies.

Businesses should ensure that the information reported in the disclosure form is consistent with their accounting records and supporting documentation.

2. Master File

The Master File gives an insight into the business operations of the MNE group and its organisation and transfer pricing practices.

This document assists the tax administration in understanding the way the MNE works in different jurisdictions.

Master Files usually include:

• Organisational and Ownership Structure of the Group.
• Nature of the Activities of the Business and Sources of Income.
• Key Intangibles.
• Financial Relationships between Companies.
• Financial Positions of the Group.
• Transfer Pricing Policy.

3. Local File

The Local File deals only with the UAE business and its related party transactions.

In contrast to the Master File that gives a general overview, the Local File describes how transactions are conducted between the UAE business and related parties and how their prices are determined.

This typically comprises:

• Management structure of the UAE firm and the nature of its activities.
• Information on related party transactions.
• Agreements and contracts between affiliates.
• Functional, asset and risk analysis.
• Transfer pricing methods selection and application.
• Financial information of the transactions.

The Local File helps demonstrate whether the UAE company’s related-party dealings comply with the arm’s length principle.

4. Supporting Documents and Agreements

Apart from formal transfer pricing reports, businesses should maintain supporting records that explain the commercial purpose and pricing of their transactions.

These may include:

• Agreements between companies.
• Invoices and accounting for payments.
• Financial reports.
• Calculations of cost allocation.
• Market comparisons.
• Service agreements.
• Loans and calculation of interest.

Maintaining these documents makes it easier to explain transactions if the FTA requests additional information.

UAE Transfer Pricing Thresholds: When Is Documentation Required?

It should be noted that not all enterprises have to make a Master File and a Local File. In order to decide about this, the UAE has set certain thresholds.

According to the UAE’s Ministerial Decision No. 97 of 2023, an enterprise has to have the two files if one of the following requirements is satisfied:

Requirement	Applicable Threshold
UAE entity revenue	AED 200 million or more during the relevant tax period
MNE group consolidated revenue	AED 3.15 billion or more during the relevant tax period

These thresholds apply independently. Meeting either condition triggers the Master File and Local File requirement.

Transfer Pricing Disclosure Form Thresholds

The disclosure requirements have separate thresholds:

• Related party transactions: The total must be above AED 40 million.
• Individual transaction classifications: Once AED 40 million is exceeded, the individual classifications that exceed AED 4 million will have to be reported.
• Connected party transactions: Payments or benefits above AED 500,000 by each connected party along with the related party must be reported.

These transaction categories encompass goods, services, intellectual property, interest, assets, liabilities, and other transactions. The setting of these threshold levels does not absolve one from compliance with the arm’s length principle.

Which Transfer Pricing Methods Can UAE Businesses Use?

Businesses must select an appropriate method to determine whether their related-party transactions follow the arm’s length principle.

The UAE recognises five internationally accepted transfer pricing methods.

1. Comparative Uncontrolled Price (CUP) Method: Involves the comparison between the price charged in the related party transaction and the price charged in the comparative transaction in independent companies.
2. Resale Price Method: Involves establishing an appropriate purchase price by considering the resale price charged in independent customers minus an appropriate gross margin.
3. Cost Plus Method: Involves establishing the transaction price through addition of an appropriate profit margin to the cost of the goods supplied.
4. Transactional Net Margin Method (TNMM): Involves analysis of the net profit margin made by the company from the controlled transaction and its comparability to that of independent companies.
5. Transactional Profit Split Method: Involves splitting the joint profits made from the related party transaction among associated companies.

The selected method should be appropriate for the transaction, available information, and economic circumstances.

What Are the Deadlines for Transfer Pricing Documentation in the UAE?

Businesses should understand the difference between submitting a disclosure form and maintaining detailed transfer pricing reports.

• Transfer Pricing Disclosure Form: Presented together with the Corporate Tax Return on an annual basis in accordance with certain thresholds.
• Corporate Tax Return: Usually submitted within nine months after the relevant tax period has expired.
• Master File and Local File: Should be kept and presented to the FTA within 30 days after the request is received.

Companies should not wait until the FTA requests documentation. Preparing the required files in advance helps avoid delays and ensures that supporting information is available when needed.

How Can Businesses Prepare for UAE Transfer Pricing Compliance?

Following a systematic approach can help businesses manage their transfer pricing obligations effectively.

Step 1: Identify Related Parties and Connected Persons

Review the company’s ownership structure, management relationships, shareholders, directors, and associated entities to identify relevant parties.

Step 2: Review Intercompany Transactions

Prepare a complete list of transactions involving related parties and connected persons, including loans, services, goods, royalties, and shared expenses.

Step 3: Evaluate Transaction Pricing

Check whether the prices and commercial conditions are consistent with the arm’s length principle. Use appropriate benchmarking and comparable market information.

Step 4: Prepare Supporting Documentation

Keep agreements, invoices, financial statements, benchmark studies, and other documents that support the transaction amounts.

Step 5: Review Disclosure Requirements

Check if the company satisfies the relevant thresholds for the UAE Transfer Pricing Disclosure Form and whether the Master File and Local File is required.

Step 6: Review Documentation Regularly

Update transfer pricing documentation in case there is any modification in business operation, transaction structure, ownership or pricing policy.

Common Transfer Pricing Compliance Mistakes to Avoid

Businesses can face unnecessary tax complications when they do not maintain proper transfer pricing records.

Some common mistakes include:

• Under the assumption that transfer pricing rules apply exclusively to international dealings.
• Using unreasonably high or low prices for dealing with other businesses within the company.
• Lack of documentation for intercompany agreements.
• Non-inclusion of dealings with shareholders and directors.
• Creation of documentation at FTA’s request.
• Use of the wrong transfer pricing method.
• Recording of transaction amounts differing from those recorded in accounting.

Avoiding these mistakes requires proper financial recordkeeping, regular reviews, and a clear understanding of the UAE Corporate Tax requirements.

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Conclusion

Compliance with UAE Transfer Pricing Regulations is vital for companies engaging in any transaction with related parties and connected parties. Proper documentation, arm’s length approach, and proper disclosure can aid companies in dealing with their Corporate Tax liabilities.

Companies need to review their intercompany transactions on a regular basis, maintain agreements and documentation prior to preparing their Corporate Tax returns.

E-Startup offers Corporate Tax and business compliance services in the UAE. Companies can get the guidance of E-Startup in understanding their regulatory compliance requirements and fulfilling their compliance obligations.

(FAQs)

1. Are UAE Transfer Pricing Rules applicable to Free Zone companies?

Yes. Companies operating under Free Zone status should also comply with the arm’s length principle in their transactions with related entities or individuals. Their tax status will not necessarily exempt them from applying transfer pricing regulations.

2. Is a Master File and Local File mandatory for every UAE company?

No. The requirement for these documents arises where the annual income of the taxable person is AED 200 million or more or where the company forms part of an MNE Group whose combined income is AED 3.15 billion or more.

3. What happens if a business does not maintain transfer pricing documentation?

It may ask for additional information to support the claim that the transactions are at arm’s length. Lack of documentation could result in difficulties in justifying the prices and might even be a reason for making tax adjustments.

4. Do domestic related-party transactions need transfer pricing documentation?

Yes. UAE Transfer Pricing Regulations apply to both intra-UAE as well as international transactions. Businesses need to adhere to the arm’s length principle irrespective of whether their associated enterprises are operating within the UAE mainland, the Free Zone or another country.