Since June 1, 2023, the United Arab Emirates (UAE) has implemented a Corporate Tax (CT) law that incorporates formal Transfer Pricing obligations. These provisions require taxpayers to demonstrate that related-party transactions (“controlled transactions”) are at Arm’s Length value, as well as to disclose information about their related-party transactions when filing their corporate tax returns. This article aims to outline the essential requirements, practical challenges, and offer strategic recommendations for effective compliance with the regulations.
Regulatory Framework: Key Obligations
Corporate Tax Return and Deadline
The United Arab Emirates’ corporate tax regulations stipulate that taxpayers must file their tax returns to the Federal Tax Authority (FTA) within a maximum period of nine months after the tax period ends. Consequently, those with a closing date of December 31, 2024, will have a filing deadline of September 30, 2025. This deadline is a key obligation to ensure timely compliance and avoid administrative penalties.
Controlled Transactions and the Arm’s Length Principle
The current tax regime defines controlled transactions as those carried out among related parties or persons, whether domestically or across borders. The general rule requires that these transactions be carried out under the Arm’s Length Principle, i.e., under conditions equivalent to those agreed upon among independent third parties. This criterion represents the basis for assessing whether the prices agreed upon among related entities reflect market values and do not distort the determination of the tax base.
Disclosure Forms
The filing of the corporate tax return includes the obligation to complete specific forms for disclosing related-party transactions. In the case of transactions whose aggregate value exceeds certain thresholds, it is necessary to provide detailed information, such as the identity of the counterparty, the nature of the transaction, its tax residence, the gross amounts recorded, the Transfer Pricing method applied, and the adjusted Arm’s Length value. This information requirement aims to provide transparency to the system and allow the FTA to effectively control transactions that, by their nature, could significantly affect the tax base.
Transfer Pricing Adjustments
When a related-party transaction is not carried out at market value, the corporate tax return must be adjusted. While adjustments that increase the tax base are recognized directly, those that reduce taxable income require the FTA’s express authorization. This distinction arises from the need to prevent misuse of adjustment mechanisms and ensure that any reduction in the tax base is duly supported.
Documentation: Local and Master Files
Although it is not mandatory to attach the local and master files to the return, taxpayers must keep this documentation prepared and available when requested by the tax authority. It is advisable to define the Transfer Pricing method to be applied, rely on solid comparability analyses, and establish consistent internal policies that support operations. Thus, the company can respond quickly and technically to any request of the tax administration.
Intra-group Transactions and Tax Groups
Taxpayers belonging to a tax group must consolidate assets, liabilities, and results, generally eliminating transactions among members. Conversely, there are specific situations in which certain adjustments must be calculated individually under the Arm’s Length Principle, such as tax losses pending compensation or when tax credits for taxes paid abroad are applicable. These exceptions reflect the need to balance the simplicity of consolidation with accuracy to determine taxes in specific contexts.
Recurring Practical Challenges
- Determination of material thresholds: Verifying whether the established limits (AED 40 million overall or AED 4 million per category) are exceeded requires exhaustive control of accounting and operational data.
- Measuring the Arm’s Length value: It requires robust comparability studies and technical support for the method applied, especially in transactions involving intangibles, services, or intra-group financing.
- Documentation upon request: Although not filed with the return, the local and master files must be prepared and available, which implies detailed work in advance to avoid penalties or tax adjustments.
Conclusion
Implementing a Transfer Pricing regime in the UAE represents a significant change in the compliance burden for companies operating in the country. Although the regulations offer some flexibility-for example, in filing local/master files upon request-taxpayers should not underestimate the importance of the information required, the need for robust technical analysis, or the risks associated with incomplete or inaccurate returns.
In the current global environment with increasing transparency standards, the UAE has aligned its regulatory framework with international practices, requiring companies to have robust Transfer Pricing models.
Call to Action
For specialized Transfer Pricing advice, TPC Group has extensive experience in Latin America, the United States, and Spain in implementing international standards policies.
Contact us today and receive the support of an expert team that will help you anticipate tax risks and strengthen your position before audits.
Source: FTIConsulting