Transfer Pricing Regulations in the UAE

April 24, 2024by Ajay Denny0

What is the Transfer Pricing Mechanism?

Transfer Pricing policies are concerned with determining the price for transactions made between related parties. 

Who is subject to Transfer Pricing Regulations?

Transfer pricing rules are applicable to UAE businesses that have transactions with Related Parties and Connected Persons, regardless of whether such Related Parties or Connected Persons are located in the UAE mainland, Free Zone, or in a foreign juridical territory. 

Why is transfer pricing subject to increased scrutiny?

Many multinational entities use the transfer pricing mechanism to shift the profits from a high tax jurisdiction to a lower tax jurisdiction as a tax reduction tactic 

  • This results in lowered revenue for respective tax authorities; thus the tax authorities of high tax jurisdiction take action to restrict such action in order to protect its interest. 

How does the related party transaction impact the financial performance of an entity?

While determining the Taxable Income, transactions, and arrangements between related parties must meet the Arm’s Length Standard.  

  • Where the result of the transaction or arrangement between Related Parties does not fall within the arm’s length range, the Authority shall adjust the Taxable Income to attain the arm’s length result that reflects the facts and circumstances of the transaction.  
  • The adjustment will have an impact on the Taxable Income of the Taxable Person and the Related party with whom the relevant transaction had taken place. 
  • If the adjustment to the Taxable Income was made by a Foreign Competent Authority, the taxable person can make an application to FTA for a corresponding adjustment to its Taxable Income 

What is the Arm’s Length Standard?

A transaction between Related Parties meets the arm’s length standard if the results of the transaction are consistent with the results that would have been obtained if Persons who were not Related Parties had engaged in a similar transaction under similar circumstances.  

How is the Transfer Price determined?

The arm’s length result of a transaction or arrangement between Related Parties must be determined by applying one or a combination of the following transfer pricing methods:  

  • The comparable uncontrolled price method.  
  • The resale price method.  
  • The cost-plus method.  
  • The transactional net margin method.  
  • The transactional profit split method.  
  •  Any other Transfer Pricing Method provided the Taxable Person can demonstrate that none of the above methods can be reasonably applied to satisfy the arm’s length principle 

What are the factors to be considered for selecting the Transfer Pricing method?

The following factors must be taken into consideration: 

  • The contractual terms of the transaction or arrangement.  
  • The characteristics of the transaction or arrangement.  
  • The economic circumstances in which the transaction or arrangement is conducted.  
  • The functions performed, assets employed, and risks assumed by the Related Parties entering into the transaction or arrangement.  
  • The business strategies employed by the Related Parties entering into the transaction or arrangement.  

Accounting standards perspective: 

Which IFRS standards enforce the TP regime?

  • IAS 24 – Related Party  
  • IFRS 10 – Consolidated Financial Statements 
  • IFRS 11 – Joint Arrangements 
  • IFRS 12 – Disclosure of Interests in Other Entities 
  • IAS 19 – Employee Benefits 

UAE Corporate Tax Perspective: 

What are the articles that enforce the TP regime in the UAE CT Law?

  • Article 34- The Arms Length Principle 
  • Article 35 – Related Parties and Control 
  • Article 36- Payments to Connected Persons, and 
  • Article 55- Transfer Pricing Documentation 

Who is considered a Related Party?

As per Article 35 of the UAE CT Law A related party includes: 

  •  Natural Persons who are related within the fourth degree of kinship or affiliation. 
  •  Natural Person and a Juridical Person where the natural person is a shareholder, and owns 50% or more ownership interest/controls the Juridical Person alone or together with its related parties. 
  •  Two or more Juridical Persons where one Person, alone or together with its related parties, directly or indirectly owns 50% or more ownership interest/controls the other juridical person(s). 
  •  A Person and its Domestic/ Foreign Permanent Establishments 
  •  Partners in an Unincorporated Partnership or a Trustee, founder, settlor, or beneficiary of a trust or foundation, and its related parties.
If you want to register for vat or corporate tax, ATB Legal helps with vat registration and corporate tax registration in the UAE.

About ATB Legal

ATB Legal is a full-service legal consultancy in the UAE providing services in dispute resolution (DIFC Courts, ADGM Courts, mainland litigation management and Arbitrations), corporate and commercial matters, IP, business set up and UAE taxation. We also have a personal law department providing advice on marriage, divorce and wills & estate planning for expats. Please feel free to reach out to us at office@atblegal.com for a non-obligatory initial consultation.

by Ajay Denny

Ajay is a young ACCA Affiliate who is eager to take on challenging opportunities, pushing the status quo, thus helping make a positive impact on the Accounting Profession and the global community at large.

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