Transfer Pricing in UAE Corporate Tax

UAE Transfer Pricing Guide

UAE is a country in which most companies, especially MNEs or even small businesses, have intercompany transactions (Company A and B sharing the same office space, common HR team, etc.). Or payments to connected persons (example: owner taking salary)

In many areas of the UAE Corporate Tax Law, the word arm’s length principle (ALP) is mentioned. In this article, we are going to understand why ALP is important in UAE Corporate Tax and what the intention of the tax authority is to emphasize the concept of ALP and transfer pricing.

Let us start with analyzing 2 scenarios.

A company registered in the UAE is owned by a BVI offshore company. In the year 2025, UAE Company takes a loan from BVI Company in the amount of AED 100 million. The loan agreement is signed between the company, and the annual interest charged is 15%. This means that UAE Company will pay AED 15 million as interest in the year 2025 and future years. While calculating the Corporate Tax, interest is an allowable expense, and UAE Company will record a profit after considering AED 15 million in interest expenditure. Here, the question arises:
Is the 15% interest as per market standard? Considering the UAE has lower interest rates compared to other countries, let us take an example of 5.5% interest per year. Why did the UAE company take the loan from the parent company for 15% annual interest?
BVI has no Corporate Tax or income tax. Is the UAE company trying to shift the profit from the UAE to a country where there is no taxation on income?
Similar to the above example, a company registered in the UAE is owned by an Italian company. The interest charged by the Italian company is 5%. This means, that in the UAE, less interest expenses, and in Italy, less interest income. Since Italy has a higher Corporate Tax than the UAE, the parent company in Italy wants to book less interest revenue in their country.

The core issue in the above situations is that the parent and subsidiary have common ownership or control where they are allowed to decide the interest rates. Here comes the transfer pricing to regulate such transactions.

What is the Arm's Length Principle?

In simple words, the arm's length principle means that two related parties or connected persons are doing transactions as if they are not related parties, in short, as at market value.

Who are the related parties?

Article 35 of the UAE Corporate Tax Law has explained who the related parties are.

2 more natural persons who are related with a fourth degree of kinship or affiliation.
A natural person, along with his related parties, directly or indirectly owns 50% or more shares in a company or has control over the company.
One company alone or with its related party owns 50% shares or control in another company.
A company and its permanent establishment (Example: a UK company and its branch are considered related parties.)
Partners in the unincorporated partnership
Members of the foundation, like the founder, beneficiary, or trustee.

Who is a connected person?

Article 36 of the UAE Corporate Tax Law explains who the connected person is, which is as below.

Owner of the company
Director or officer of the company
Related party of owner, director, or officer of the company.

Now you must have understood the importance of transfer pricing and the arm’s length principle in UAE Corporate Tax. The next challenge is when there is a transaction or arrangement between a related party and a connected person, how to determine the consideration for such transactions.

UAE has adopted the framework of the Organization of Economic Cooperation and Development to determine the value and amount of the related party and connected person transactions. There are 5 methods prescribed in the Corporate Tax Law for the arm’s length calculation. There is no better method; any method that can be used depends on the nature of the transactions. Below are the acceptable methods in UAE Corporate Tax.

1. The Comparable Uncontrollable Price Method (CUP Method)

This method can be used when a company sells identical products or services to related parties and untreated parties. The comparison can be internal or external. Internal comparable means the price/fee charged by the company to their own clients compared with the price/fee charged to their related party. Externally comparable means comparing the price/fee charged for identical goods or services by the market.

2. Resale Price Method

This method can be used to determine the consideration for similar goods or services provided to a related party. Under this method, the gross profit margin of similar goods or services needs to be calculated and applied to the same percentage while providing it to a related party.

Example: A company’s income from providing management services to unrelated parties is as follows:

Revenue: AED 100

Direct Expenses: AED 70

Gross Profit: AED 30

Gross Profit Margin: 30% (30*100/100)

At the time of providing management consulting services to a related party, a 30% gross profit margin can be considered under this method.

3. Cost Plus Method

Under this method, when there is a related party transaction, the service provider can calculate and add a certain percentage of margin to the cost. The margin shall be based on the value addition service provider given to the related party.

4. Transactional Net Margin Method

This is a widely used method for determining the arm’s length and is easy to implement because of the availability of the data. Under this method, unlike other methods, even if the products or services are not identical or similar, it is accepted. This method can be applied as follows:

Calculate the net profit of the company.
Calculate the net profit margin (net profit/sales * 100).
Apply this percentage for related party transactions.

5. Profit Split Method

Under this method, if revenue is generated using the assets or resources of related parties, the profit generated can be divided between related parties to the extent of the assets or resources used for generating such revenues.

Transfer Pricing Documentations

Article 55 of the UAE Corporate Tax Law and Ministerial Decision No.97 of 2023 have given guidance regarding the document requirements for Corporate Tax purposes.

Disclosure forms: In this form, either at the time of filing Corporate Tax returns or within 30 days from the date of request from authority, the necessary transactions and arrangements between related parties shall be submitted in the prescribed formats.
Master File and Local File: A Master and/or Local File shall be maintained by the below-taxable person and shall be submitted within 30 days from the date of request from the authority.
- Multi-national entities whose turnover is more than 750 million euros (3.15 billion dirhams) in any relevant tax year.
- A taxable person whose turnover is more than 200 million dirhams in any relevant tax year.

Do you know if you are a free zone company and looking forward to 0% Corporate Tax, transfer pricing is one of the conditions to become eligible for 0% Corporate Tax. Read more

To learn more about Transfer Pricing in UAE Corporate Tax, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.