Understanding UAE Transfer Pricing: A Comprehensive Guide for Businesses 

The United Arab Emirates (UAE) has emerged as a global business hub, attracting multinational enterprises (MNEs) and local companies alike. With the introduction of the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022), effective from June 1, 2023, transfer pricing has become a critical aspect of tax compliance. This blog provides a clear, comprehensive, and practical guide to UAE transfer pricing regulations, based on the Transfer Pricing Guide published by the UAE Federal Tax Authority (FTA) on October 23, 2023. Designed for business owners, tax professionals, and financial managers, this article breaks down the essentials of transfer pricing, including key principles, methods, documentation, and compliance requirements, ensuring clarity and accessibility. 

What is Transfer Pricing? 

Transfer pricing refers to the pricing of transactions between related parties, such as subsidiaries of the same multinational group or entities under common control. These transactions can include the sale of goods, provision of services, licensing of intellectual property, or financial arrangements like loans. The goal of transfer pricing regulations is to ensure that these transactions are priced as if they were conducted between independent parties under similar circumstances—a concept known as the arm’s length principle. In the UAE, transfer pricing rules apply to both domestic and cross-border transactions, ensuring fairness in tax calculations and preventing profit shifting to low-tax jurisdictions. 

The Arm’s Length Principle: The Core of UAE Transfer Pricing 

The arm’s length principle is the foundation of transfer pricing. It requires that the terms and conditions of transactions between related parties mirror those that would apply between independent entities in comparable circumstances. This ensures that taxable income reflects the economic reality of the transaction. For example, if a UAE-based subsidiary sells goods to its parent company in another country, the price should align with what an unrelated buyer would pay in a similar market. 

Who Needs to Comply with UAE Transfer Pricing Rules? 

Transfer pricing rules apply to transactions involving: 

• Related Parties: Entities or individuals under common control, ownership, or significant influence (e.g., parent-subsidiary relationships, entities with shared directors, or ownership exceeding certain thresholds). 

• Connected Persons: Individuals or entities with a direct or indirect relationship that could influence tax outcomes, such as key management personnel or their relatives. 

These rules cover a wide range of transactions, including: 

• Sale or purchase of goods. 

• Provision of intra-group services (e.g., management or IT services). 

• Licensing of intangible assets (e.g., trademarks or patents). 

• Financial transactions (e.g., loans or guarantees). 

Certain entities, such as those exempt from corporate tax (e.g., government entities or qualifying free zone businesses), may be exempt from transfer pricing requirements, subject to specific conditions. 

Transfer Pricing Methods in the UAE 

The UAE Transfer Pricing Guide outlines five primary methods, aligned with OECD guidelines, to determine arm’s length pricing. Businesses should select the most appropriate method based on the nature of the transaction and available data. These methods are: 

• Comparable Uncontrolled Price (CUP) Method: 

• Compares the price in a controlled transaction with the price in a similar uncontrolled transaction (e.g., between independent parties). 

• Suitable for transactions with readily available market data, such as commodity sales. 

• Resale Price Method: 

• Starts with the resale price charged to an independent buyer and subtracts an appropriate gross margin to determine the transfer price. 

• Often used for distributors or resellers. 

• Cost-Plus Method: 

• Adds an appropriate markup to the costs incurred by the supplier in a controlled transaction. 

• Ideal for manufacturing or service provision with clear cost structures. 

• Transactional Net Margin Method (TNMM): 

• Examines the net profit margin relative to an appropriate base (e.g., costs, sales, or assets) in a controlled transaction, compared to similar uncontrolled transactions. 

• Commonly used for complex transactions with limited comparable data. 

• Profit Split Method: 

• Allocates profits between related parties based on their contribution to the transaction’s economic value. 

• Suitable for highly integrated operations or transactions involving unique intangibles. 

If none of these methods are suitable, taxpayers may propose an alternative method, provided they can justify its alignment with the arm’s length principle. 

Documentation Requirements for UAE Transfer Pricing 

To demonstrate compliance, businesses must maintain detailed transfer pricing documentation. The FTA requires MNEs with consolidated group revenue of AED 3.15 billion or more (Country-by-Country Reporting (CbCR) applies as well) and Local entities with AED 200 million or more to maintain two main types of documentation: 

• Master File (for HQs): 

• Provides an overview of the multinational group’s global operations. 

• Includes details on business activities, organizational structure, intangible assets, intra-group financial activities, and financial/tax positions. 

• Local File: 

• Focuses on specific transactions involving the UAE entity. 

• Includes details on related parties, transaction descriptions, amounts, and the transfer pricing method applied. 

Documentation must be prepared contemporaneously (i.e., at the time of the transaction or tax return filing) and submitted to the FTA within 30 days of a request. Failure to comply can result in penalties under the Corporate Tax Law. 

Does UAE TP apply to companies who do not meet the above threshold

Yes, companies with the following Related Party Transaction(s) of AED 40 million or more are required to maintain justification for arm's-length pricing, not necessarily a local file, but intercompany agreements based on TP study or email advice or memo applying value chain or FAR analysis.

Intra-Group Services 

• Services (e.g., management, HR, or IT support) must provide a genuine economic benefit to the recipient. 

• Charges should reflect arm’s-length pricing, supported by evidence of services rendered and costs incurred. 

Intangible Assets 

• Transactions involving intellectual property (e.g., trademarks, patents) must be priced based on market rates. 

• Documentation should justify the economic value and benefits of the intangible asset. 

Financial Transactions 

• Loans, guarantees, or other financing arrangements must reflect market interest rates and terms. 

• Comparability analysis is critical to ensure arm’s length conditions. 

Advance Pricing Agreements (APAs) 

Businesses can reduce compliance risks by entering into an Advance Pricing Agreement (APA) with the FTA. An APA pre-agrees the transfer pricing methodology for specific transactions, providing certainty and minimizing audit risks. APAs are particularly beneficial for complex or high-value transactions. 

Exemptions and Thresholds 

Certain entities may be exempt from transfer pricing rules, including: 

• Entities fully exempt from corporate tax (e.g., government bodies). 

• Qualifying free zone businesses, subject to specific conditions. 

Small and medium enterprises may face relaxed documentation requirements, depending on revenue or transaction thresholds. However, all businesses must maintain sufficient records to justify arm’s length pricing during an FTA audit. 

Why DP Taxation Consultancy? 

Our experts can help you with everything from complex transfer pricing to day-to-day bookkeeping under the IFRS standards, ensuring compliance and mitigating risks. Please visit our website, www.dptc.ae, to book a free consultation with our tax and transfer pricing experts.

Contact us by booking a consultation on: dptc.ae

Or call us at +971 050 943 4155 for tailored solutions!

For further inquiries, email us at bd@dptc.ae.