The UAE introduced Transfer Pricing ("TP") regulations as part of its Corporate Tax Law under Federal Decree-Law No. 47 of 2022, which applies to tax periods starting on or after 1 June 2023. Businesses must comply with these rules to ensure that transactions between related parties are conducted at arm's length (fair market value).
Key legal references for TP compliance:
- Corporate Tax Law
- Ministerial Decision No. 97 of 2023
- OECD Transfer Pricing Guidelines
Who Must Follow Transfer Pricing Rules?
TP rules apply to all taxable businesses that engage in transactions with Related Parties or Connected Persons. Even if a business is exempt from tax or qualifies for small business relief, it must still follow TP rules but may not be required to maintain full TP documentation.
What are the Transfer Pricing Documentation Requirements?
Businesses that engage in transactions with Related Parties or Connected Persons may be required to prepare TP documentation. The key requirements include:
- Transfer Pricing Disclosure Form– All Taxable Persons who undertake transactions with Related Parties or Connected Persons (domestic or foreign) in the reporting Tax Period and are above a materiality threshold specified below, are required to prepare and submit a general Transfer Pricing disclosure form, alongside their Tax Return.
- Primary Threshold: Aggregate value of all transactions with all related parties exceeds AED 40 million.
- Secondary Threshold: Aggregate value of transactions per category with all related parties exceeds AED 4 million.
Once this primary threshold is surpassed, individual transaction categories exceeding AED 4 million must also be disclosed.
- Local and Master File – A Taxable Person is required to maintain both a Master File and a Local File if it meets either one of the following two conditions:
- It is a Constituent Company of an MNE Group with a total consolidated group revenue of at least AED 3,150,000,000 in the relevant Tax Period or
- If their own revenue for the same period meets or exceeds AED 200,000,000.
The documentation must be prepared by the time the Taxable Person submits its Tax Return for the Tax Period in which the Controlled Transaction is undertaken.
Master Files and Local Files must be made available to the FTA within 30 days upon request.
- Country-by-Country Report – The Country-by-Country report provides jurisdictional quantitative information about an MNE Group and applies to businesses that are part of an MNE Group with consolidated revenue exceeding 3.15 billion AED.
- Additional supporting information – May be requested by the Federal Tax Authority (FTA).
What is the definition of a related party?
Related parties are defined under Article 35 of the Corporate Tax Law as any associated Persons, which is defined through:
- Kinship or affiliation: Individuals who are related up to the fourth degree of kinship or affiliation;
- Ownership: One or more persons directly or indirectly owning 50% or a greater interest in another juridical person; or
- Control: Direction and influence over another in exercising 50% or more of the voting rights, or controlling 50% or more of the board of directors, or being able to receive 50% or more of the profits of another person.
What is the definition of Connected Persons?
A person is considered a Connected Person of a taxable person if that person is:
- an individual, who directly or indirectly owns an ownership interest in the Taxable Person or Controls such Taxable Person;
- a director or officer of the Taxable Person, or a Related Party of the said director or officer; or
- a partner in an Unincorporated Partnership, and any Related Parties of such partner.
Key Takeaways
- All businesses must follow TP rules if they engage with Related Parties or Connected Persons.
- Documentation is required based on transaction size and business revenue.
- Compliance ensures businesses avoid penalties and tax risks.
How can we assist
Kinanis Tax Consultancy Middle East Limited can assist you to:
- Assess if the intragroup transactions of an entity exceed the thresholds;
- Prepare the Disclosure Form;
- Prepare the required documentation - Local File, Master File, Country-by-Country Report;
- Assist in the formation of the internal transfer pricing policy;
- Represent you in a transfer pricing dispute with the tax authorities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
