For many UAE business owners, transfer pricing sounds like something that only concerns multinationals. Under UAE Corporate Tax, that is no longer the case. Any business that deals with related parties or connected persons needs to think about it.
The arm’s length principle
Transactions between related parties must be priced as they would be between independent parties in similar circumstances. If they are not, the Federal Tax Authority can adjust your taxable income.
Related parties include, among others, companies under common ownership or control of 50% or more, and individuals who are related to each other.
Connected persons
Payments to connected persons, such as owners, directors and officers of the business, and their related parties, are only deductible to the extent they reflect market value and are incurred for the business. This catches common arrangements in owner-managed businesses, such as management fees or rent paid to a shareholder.
Typical transactions to review
- Sales and purchases of goods between group companies.
- Management fees and shared service charges.
- Loans between companies or from shareholders, and the interest on them.
- Rent paid for property owned by a shareholder.
- Salaries and fees paid to owners and their family members.
Documentation
Ministerial Decision No. 97 of 2023 sets out documentation requirements. A master file and local file are required for businesses with revenue of AED 200 million or more, or that are part of a multinational group with consolidated revenue of AED 3.15 billion or more. Many other businesses will need to file a transfer pricing disclosure with their tax return, listing their related party and connected person transactions.
Even where formal files are not required, you should be able to explain how your prices were set.
Where to start
- List your related parties and connected persons.
- Identify all transactions with them, and the amounts involved.
- Check whether the terms reflect what independent parties would agree.
- Document your approach, and put written agreements in place.
Getting this right before your first Corporate Tax return is far easier than defending it afterwards. We can help you review your transactions and prepare the documentation needed.
This article is general information based on the rules as we understand them at the date of publication. It is not advice on your circumstances. Laws and practice change, so please speak to us before acting on it.
