Tax Services in the United Arab Emirates

What Is Transfer Pricing?

Transfer Pricing refers to the rules and processes used to determine whether transactions between related parties or connected persons are conducted under terms and prices comparable to those that would apply between independent parties.

Transfer Pricing is an important Corporate Tax matter because it helps ensure that income and expenses between related parties are presented fairly and do not result in improper profit shifting or an incorrect reduction of taxable income.

Why Are Transfer Pricing Rules Important?

• Reducing profit shifting between related parties.
• Ensuring that transactions follow the arm's length principle.
• Supporting compliance with UAE Corporate Tax requirements.
• Reducing tax adjustment risks during audits or reviews.
• Organizing disclosures and documentation for related party transactions.

Who Are Related Parties?

Related parties may include persons or entities connected through ownership, control, or significant influence. These relationships should be reviewed when preparing Corporate Tax filings or assessing transactions between group companies and connected persons.

• A company and its subsidiaries.
• Sister companies or companies under common control.
• Owners and shareholders in certain cases.
• Entities within the same group.
• Parties with influence or control over business decisions.

Who Are Connected Persons?

Connected persons may include certain individuals or persons that are directly or indirectly connected with the business, its owners, or management. Some transactions with connected persons may require specific review under UAE Corporate Tax requirements.

• An owner or shareholder in certain cases.
• A director or key management person.
• Certain family members or relatives under applicable rules.
• Persons or entities connected through ownership, control, or influence.

What Is the Arm's Length Principle?

The arm's length principle means that transactions between related parties should be conducted under terms and prices similar to those that would apply between independent parties in comparable circumstances.

Where sales, purchases, financing, services, management charges, or other transactions take place between related parties, the pricing and terms should reflect the fair value of the transaction.

Transactions That May Require Transfer Pricing Review

• Loans and financing between related parties.
• Management and consultancy services.
• Management fees and technical support charges.
• Sale and purchase of goods.
• Leasing of assets or property.
• Use of trademarks or intellectual property.
• Royalties and licensing fees.
• Transactions between group companies.

Transfer Pricing Documentation

Certain businesses may need to maintain documentation explaining the nature of related party transactions, pricing methods, and the basis for demonstrating that transactions are consistent with the arm's length principle.

These documents support the business position during tax audits or where additional information is requested by the Federal Tax Authority.

Tax Disclosures for Related Party Transactions

Corporate Tax may require disclosure of certain transactions with related parties or connected persons in tax returns or other required forms and disclosures.

These disclosures should be reviewed carefully to ensure completeness, accuracy, and correct tax treatment.

Transfer Pricing and Free Zone Companies

Transfer Pricing rules are also important for Free Zone companies, particularly where they transact with related parties inside or outside the UAE, or where qualifying income and non-qualifying income need to be assessed.

Common Transfer Pricing Mistakes

• Failure to identify related parties correctly.
• Failure to document related party transactions.
• Using unsupported prices or terms.
• Failure to disclose required transactions.
• Failure to maintain supporting documents.
• Assuming internal transactions are not important without tax review.

Transfer Pricing Tax Risks

Failure to comply with Transfer Pricing requirements may create tax risks such as adjustments to taxable income, disallowance of certain expenses, penalties, or requests for additional documentation during a tax audit.

How to Prepare for Transfer Pricing Compliance

• Identify related parties and connected persons.
• Review transactions between related parties.
• Assess pricing and commercial terms.
• Prepare supporting documentation where required.
• Review required tax disclosures.
• Maintain records, correspondence, and relevant contracts.

How Can We Help?

We assist businesses with reviewing related party transactions, assessing compliance with the arm's length principle, preparing Transfer Pricing documentation, reviewing tax disclosures, and reducing Corporate Tax risks in accordance with UAE requirements.

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