Introduction

The tax scene in the United Arab Emirates (UAE) has seen significant changes over the last few years with the introduction of a corporate tax, transfer pricing legislation and ongoing efforts to implement the global minimum taxation in Pillar Two. Against this evolving background, the UAE’s Federal Tax Authority (FTA) published a comprehensive guide on transfer pricing (FTA Guide) which generally aligns with the OECD Transfer Pricing Guidelines (OECD Guidelines). In light of this, it is imperative that taxpayers understand their transfer pricing obligations in the UAE to ensure their compliance and to mitigate the possibility of disputes arising.

Scope

Transfer pricing in the UAE applies extensively to all UAE taxpayers entering into transactions with associated persons. Entities that are exempt from corporate tax or elect for small business relief are not required to prepare and maintain transfer pricing documentation but are still subject to transfer pricing legislation and must abide by the arm’s length principle.

The UAE has established free trade zones on its territory providing beneficial treatment to persons established within them. Subject to meeting the specific conditions, a person established in a free trade zone can generally qualify for a preferential tax rate of 0 percent on qualifying income; however, such persons remain in scope of the transfer pricing rules. All related party transactions must be at arm’s length and appropriate documentation must be maintained, subject to the materiality thresholds.

Related parties and connected persons

Related parties are any associated persons having a specified degree of association, including a pre-existing relationship with another person through kinship (up to the fourth degree), ownership or control, regardless of the other person’s residence. This includes a person acting alone or together with its related parties, having a controlling interest or common ownership, generally understood as greater than 50 percent.

The UAE extends the scope transfer pricing rules to connected persons, broadening the application of transfer pricing and requiring greater consideration to determine whether the transfer pricing rules apply. Connected persons can be:

• An individual (or a related party) directly or indirectly owning an interest or controlling the taxable person
• A director or officer (or a related party) of the taxable person
• A partner in an unincorporated partnership and any related parties

Arm’s length principle

Transactions between related parties or connected persons must meet the arm’s length standard. It provides the basis for transfer pricing rules in the UAE and follows the internationally recognized arm’s length principle. The FTA Guide emphasizes the treatment of related party entities as distinct, ensuring that each receives an equitable portion of profits in line with its functional profile and contribution to the value chain.

The FTA Guide also indicates that local or regional comparables should be prioritized when performing benchmarking studies in any transfer pricing policy. The use of comparables from other geographies may be considered where local/regional ones are unavailable. A multinational group with a group-wide transfer pricing policy may use this policy for the UAE, but it must be evaluated to consider whether it accounts for UAE/regional comparables.

Permanent establishments

Permanent establishments are defined as fixed or permanent places of business through which business activities of an enterprise are conducted wholly or partly. The existence or otherwise of a permanent establishment influences the taxation of profits, both in the UAE and other jurisdictions and it is therefore important to consider this carefully as it carries significant tax and transfer pricing implications.

The UAE follows the authorized OECD approach for the attribution of profits to permanent establishments, determining an arm’s length remuneration for the permanent establishment as if it were a separate entity. Permanent establishments are therefore also within the scope of UAE transfer pricing rules, and additional guidance is provided for determining the existence of a permanent establishment and attributing profit based on the arm’s length principle.

Documentation

Taxpayers entering into domestic or cross-border transactions with related parties or connected persons must prepare a transfer pricing disclosure form and file it with their annual tax return. This should contain information on the transactions, such as their nature and value, details of related parties, and the transfer pricing methods used to determine the arm’s length value.

Transfer pricing documentation requirements also include the master file and local file for taxpayers who enter into both cross-border and domestic transactions with related parties or connected persons exceeding either of the below thresholds:

• The taxpayer is part of a multinational group with consolidated revenue exceeding AED 3.15 billion in a tax period (approx. €785 million).
• The taxpayer has revenues of more than AED 200 million (approx. €50 million).

A taxpayer that does not meet the thresholds but is part of a multinational group must still maintain the two files. The local file must also be kept by taxpayers in a wholly domestic group that meets the thresholds.

The obligation to file a country-by-country report applies to UAE-headquartered multinational groups with revenues exceeding AED 3.15 billion in the previous financial year. UAE tax resident entities that are not the ultimate parent entity must notify the FTA with details of the reporting entity by the end of the multinational’s reporting year.

Special considerations

The OECD Guidelines generally provide more granular detail on specific cases—such as financial transactions or intra-group services—than the FTA Guide and should form an important reference when evaluating the application of transfer pricing rules to specific cases. Nevertheless, the FTA Guide also provides more detailed considerations on specific aspects of the transfer pricing rules.

This includes guidance on maintaining documentation related to intra-group services which supports the existence of a benefit being granted through the service and providing information on the key details of the service.

The FTA Guide follows Chapter VI of the OECD Guidelines for intangibles and the definition of intangibles in both is generally aligned. The FTA Guide re-emphasizes the importance of maintaining a detailed functional analysis to determine who performs the relevant DEMPE functions in relation to intangibles and how to allocate the returns from their exploitation.

Considerations for business restructurings are generally aligned with the OECD Guidelines, but these are extended and also apply to domestic restructurings. Emphasis is made on accurately delineating transactions and justifying the commercial rationale of the restructuring. It also requires an understanding of the expected benefits, including the potential reallocation of profit potential and indemnification of the restructured person.

Burden of proof

Taxpayers are ultimately responsible to ensure that sufficient evidence and documentation is maintained to support the applied transfer pricing policies showing that the arm’s length principle is respected. Transfer pricing adjustments may be applied by either the taxpayer or the FTA where a transaction is not conducted at arm’s length. Furthermore, the FTA may opt to disregard a controlled transaction where it is believed that third parties in comparable circumstances would not have entered into that transaction.

Outlook

Considering the above changes, taxpayers with operations in the UAE should now be evaluating their operations to assess the impact of the transfer pricing rules. While this brings significant change and challenges, it also provides an opportunity to optimize operations and continue to benefit from the UAE’s unique business landscape.