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Provisions of Article 35 of the UAE CT Law, define related parties as under:
Two or more natural persons who are related within the fourth degree of kinship or affiliation, including by way of adoption or guardianship.
A natural person and a juridical person where:
the natural person or one or more related parties of the natural person are shareholders in the juridical person, and the natural person, alone or together with its related parties, directly or indirectly owns > 50% ownership interest in the juridical person; or
the natural person, alone or together with its related parties, directly or indirectly controls the juridical person.
Two or more juridical persons where:
one juridical person, alone or together with its related parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in the other juridical person;
one juridical person, alone or together with its related parties, directly or indirectly controls the other juridical person; or
any Person, alone or together with its related parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in or controls such two or more juridical persons. A person and its Permanent Establishment (PE) or foreign PE;
two or more persons that are partners in the same unincorporated partnership; or
a person who is the trustee, founder, settlor or beneficiary of a trust or foundation, and its related parties.
Further, ‘control’ means the ability of a person to influence the other person, by:
Ability to exercise > 50% of the voting rights of another person;
Ability to determine the composition of > 50% of the board of directors of another person;
Ability to receive > 50% of the profits of another person; or
Ability to determine, or exercise significant influence over, the conduct of the Business and affairs of another Person. Examples of determinants of Controls includes the ability to determine, or exercise significant influence over, the conduct of the Business wherein ‘significant influence’ may involve an exercise to influence and direct the Business by virtue of debt, entitlement to profit share, majority interest etc.
As per Article 36 of the UAE CT Law, a connected person of a taxable person is defined as if that person is:
An owner of the taxable person.
A director or officer of the taxable person.
A related party of any of the persons referred to in paragraphs (a) and (b) of the above clauses.
For the purposes of paragraph (a), an owner of the taxable person is any natural person who directly or indirectly owns an ownership interest in the taxable person or controls such taxable person.
Where the taxable person is a partner in an unincorporated partnership, a connected person is any other partner in that same unincorporated partnership, and any person that is a related party of that partner.
The UAE transfer pricing guide is broadly in alignment with the January 2022 OECD transfer pricing guidelines for multinational enterprises and tax administrations (OECD TP guidelines). The UAE transfer pricing guide also mentions that if a certain aspect is not covered, taxpayers are encouraged to refer to OECD TP guidelines if an issue is not addressed herein.
There are five internationally accepted transfer pricing methods detailed in the OECD TP guidelines and internalised under Article 34(3) of the UAE CT Law: the Comparable Uncontrolled Price method, the Resale price method, the Cost-plus method, the Transactional Net Margin method and the Profit Split method.
Apart from that, if none of the five recognised methods can be reasonably or reliably applied, and provided these other methods satisfy the Arm’s Length Principle, Article 34(4) of the UAE CT Law also allows the use of other methods to calculate the Arm’s Length Price when the five recognised Transfer Pricing methods cannot be reasonably or reliably applied, provided they meet the Arm’s Length Principle.
In cases where the application of one of the Transfer Pricing methods proves inconclusive, a combination of methods may be the most accurate approach. Where a combination of methods is used to test the Arm’s Length Principle, the primary aim should be to reach a conclusion that takes account of the facts, circumstances and available evidence of the case per the per the UAE TP guide.
Overview
A TPDF is required to be prepared and submitted by all taxable persons who undertake transactions with related parties and connected persons and are above a materiality threshold (yet to be prescribed).
The TPDF is required to be submitted alongside the CT return which is due in nine months from the end of the relevant tax period.
A taxable person that meets either of the following conditions in the relevant tax period shall prepare and maintain a MF and LF:
Where the taxable person, for any time during the relevant tax period, is a constituent company of a Multinational Enterprises Group that has a total consolidated group Revenue of AED 3.15 billion or more in the relevant tax period; or
Where the taxable person’s revenue is AED 200 million or more in the relevant tax period.
However, as an exception, any taxable person that is part of a UAE headquartered group that is not an MNE Group (i.e., a Group that does not have business establishments outside the UAE) is not required to maintain a MF. However, they should maintain a LF as per the above thresholds.
The FTA can request such documentation to be produced within thirty days following a request by the FTA, or by any such other later date as the FTA directs.
The CbCR regulations in the UAE are effective from fiscal years starting on or after 1 January 2019 for multinational groups with revenues over AED 3.15 billion (approx. USD 858 million).
The CbCR shall be filed within 12 months following the end of reporting fiscal year of the multinational entity groups (MNE) in line with the standard template set out at in Annex III of Chapter V of the OECD TP Guidelines.
Apart from that, a notification must be submitted by the UAE-tax resident ultimate parent entity (UPE), on behalf of the UAE Constituent Entities, to the UAE MoF to indicate that it is the entity responsible for submitting the CbC Report and identifying the UAE Constituent Entities no later than the last day of the group's reporting year.
As per the Cabinet Decision No.75 of 2023 issued by MoF, a certain set of violations including AED 10,000 for each violation and AED 20,000 in case of repeated violation within 24 months from the date of last violation due to the failure to maintain the necessary records and information as mandated by the Tax Procedures Law and the CT Law by individuals or entities engaged in business activities or subject to tax obligations.
Non-compliance with CbCR and Notification requirements can draw penalties ranging from AED 10,000 to AED 1,000,000.
As per Article 59(1) of the UAE Corporate Tax Guide, a taxpayer may make an application to the Authority for a clarification regarding the application of this Decree-Law or the conclusion of an advance pricing agreement (APA) with respect to a transaction or an arrangement proposed or entered into by the taxpayer.
The FTA has provided further details on the upcoming implementation of APA framework through an update to Decision No. 4 of 2024. While the updated decision does not delve into the specifics of the APA process or technical requirements, it outlines the minimum information necessary for individuals seeking clarification from the FTA regarding the APA framework.
The burden of proof to substantiate the arm’s length nature of controlled transactions lies with the taxpayers.
The TP guide emphasises the importance of meeting the benefit test to prove that the arrangement was not solely motivated by corporate tax advantages.
It is important to note that all controlled transactions must have a valid commercial purpose, and respective substantiation/ documentation that supports this economic rationality.
These practices are recommended for all businesses, specially, in case of loss-making entities and availing intercompany services which is always under the tax authorities' radar.
Taxable persons that do not meet the thresholds or entities that are exempt from maintaining TP documentation are still required to maintain reasonable records to substantiate the arm’s length nature of the controlled transactions. The FTA has the power to request such information to be produced within 30 days of request.
Taxpayers have an option to make suo-moto adjustment (post filing of return) which results in increased taxable profits / reduced allowable losses. However, in case of a suo-moto adjustment that results in reduction of taxable profits / increased allowable losses, such adjustment can be implemented only during audits conducted by FTA.
The FTA has the power to adjust the taxable profits of the taxpayer to achieve arm’s length results that reflects actual economic circumstances of the arrangement. The FTA will also reflect the corresponding adjustment in the taxable income of the local entity that is a party to this arrangement.
The FTA has the power to adjust a taxpayer's taxable income to ensure that it reflects the true economic value of controlled transactions. The FTA will share the information used to make these adjustments.
In summary, the FTA can ensure that taxpayers pay the correct amount of tax, this is important to prevent tax avoidance and to ensure that all taxpayers are treated fairly.
As mentioned previously, not all the taxpayers are required to maintain a MF and LF. Taxpayers that do not meet the thresholds or entities that are exempt from maintaining TP documentation are still required to maintain reasonable records to substantiate the arm’s length nature of the controlled transactions. The FTA has the power to request such information to be produced within 30 days of request.
For further information on transfer pricing in the United Arab Emirates please contact:
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Anuj R. Kapoor |
Anna Nikolayko |
