The Fundamentals of Transfer Pricing in the UAE

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Transfer Pricing (TP) has become a critical aspect of tax regulations worldwide, including in the UAE. It revolves around pricing transactions influenced by the relationship between transacting parties. The UAE's Corporate Tax Law mandates adherence to the Arm’s Length Principle (ALP), requiring transactions to be conducted at market value, as if between independent parties.

FTA’s Transfer Pricing Guide helps us understand the basics of TP with the help of some real-life examples.

Controlled Transactions:

A controlled transaction is a transaction or arrangement between related parties or connected persons. These include trading in goods, provision of services including management support and back office services, financial transactions like loans, guarantees etc.

The Guide provides that all cross border controlled transactions as well as domestic controlled transactions (i.e., transactions between persons located in the UAE, including transactions undertaken between Free Zone Persons) must be at a fair price or must follow the Arm’s Length Principle (ALP).

Arm’s Length Principle:

Controlled transactions can be influenced by the relationship between the parties, leading to non-arm’s length pricing and potential tax avoidance. The ALP necessitates pricing transactions between related parties as if the transactions are conducted between independent entities. It focuses on determining the price that independent parties would agree upon and requires a comparability analysis to ensure to arrive at such pricing.

The guidance illustrates the application of TP principles through real-life examples where the overall group profits remain the same by applying ALP, however, the tax liability in different jurisdictions may change.

Related Parties:

Related parties are persons associated with each other by way of:

1. Kinship or Affiliation:

Kinship or affiliation covers relationships up to the fourth degree of kinship, including blood ties and relationships by marriage. The degrees of kinship progressively extend from parents and children to great-great-grandparents and first cousins, encompassing both natural persons and their spouses.

2. Ownership:

Related parties can also be established through ownership, where a natural person or juridical entity holds 50% or more interest in another entity. This ownership relationship extends to indirect holdings through multiple layers of ownership, as illustrated in Example 2 of the Guide.

3. Control:

Control is determined by the direction and influence exerted by one person over another. It can be established through voting rights, board composition, profit entitlement, or significant influence over business conduct. Example 3 demonstrates how significant influence can arise through debt, while Example 4 highlights control based on profit entitlement.

4. Others

A related party also includes a permanent establishment (PE) or a foreign PE, persons who are partners in the same unincorporated partnership as well as a trustee, founder, settlor or beneficiary of a trust or foundation.

Connected Persons:

Connected persons are individuals or entities closely associated with a taxable person. This includes individuals with ownership or control over the taxable person, directors or officers, partners in unincorporated partnerships, and their related parties. The Guide specifies scenarios where deductions for payments or benefits to connected persons are restricted to arm’s length prices.

Conclusion:

The UAE's Corporate Tax Law, in tandem with the global TP principles, incorporates the Arm’s Length Principle to promote transparency and equity in transactions between related parties. In real-life scenarios, the relations between transacting parties, determined by an arrangement or by conduct of the parties, may be complex. The onus of establishing whether the parties are related or independent parties, primarily lies with the taxpayer. 

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