To solve this conundrum, the UAE has introduced detailed transfer pricing guidance and regulations under its Corporate Tax Law and Ministerial Decision No. 97 of 2023. These regulations are set to ensure that businesses price their related-party transactions fairly, just like they would with unrelated businesses in an open market.
What is Transfer Pricing in the UAE?
Transfer Pricing means setting prices for transactions between businesses that are connected. These transactions can inter alia, involve goods, services, loans, or use of property. When independent companies deal with each other, they would generally agree on the price through mutual discussion and negotiations. However, when the businesses are connected (like two companies owned by the same person or group), there’s a risk that prices can be set such that the ultimate taxes get reduced.
To prevent this from happening, the UAE applies something called the Arm’s Length Principle. This rule says that connected businesses must set prices as if they were unrelated. In other words, the price should match what independent companies would agree on under same or similar conditions.
If the above narrative has confused you, not to worry – our tax agents in the UAE would be happy to guide you further.
The Arm’s Length Principle in the UAE
Article 34 of the UAE Corporate Tax Law clearly states that all related-party and connected-person transactions must follow the Arm’s Length Principle. This means:
- The pricing should be based on what any two or more independent companies would agree to.
- If there’s no written contract or the price seems too low or too high, authorities will check if the transaction meets market standards.
- The law doesn’t ignore informal agreements. Even unwritten deals between related businesses must follow fair pricing.
Who Must Follow These Rules?
The transfer pricing in the UAE apply to companies involved in Controlled Transactions. These are transactions between:
- Related Parties (like companies under common ownership or individuals with family ties)
- Connected Persons (often people with influence over a business, such as owners or senior managers)
Even if a company is exempt from corporate tax or qualifies for small business relief, it still has to follow the Arm’s Length Principle. However, such businesses may not be required to prepare full transfer pricing documentation, unless they exceed the stipulated thresholds.
Who Counts as a Related Party?
The UAE law offers a clear breakdown of who counts as a related party:
- Kinship or Family Ties
Individuals are related up to the fourth degree of kinship. This includes:
Parents, children, spouses, siblings, grandparents, uncles, aunts, nieces, nephews, cousins, and their in-laws.
Relationships through adoption or guardianship also count.
- Ownership Links
A person or group is considered related to a company if:
- They own 50% or more of it directly or indirectly.
- Two companies are related if one owns at least 50% of the other or if a third party owns at least 50% of both.
- Control and Influence
- Even without 50% ownership, a person or entity may be considered related if they can control how a business operates. Control can include:
- Voting power
- Decision-making rights
- Management influence
These links help tax authorities decide whether a transaction needs to be reviewed under transfer pricing regulations in the UAE.
Still need more insights? Then, kindly ask your transfer pricing consultants in Dubai to clear the concepts.
What Counts as a Controlled Transaction?
Controlled transactions include more than just buying and selling goods. They also cover:
- Â Â Â Services between group companies
- Â Â Â Royalties and licensing fees
- Â Â Â Loans and financial arrangements
- Â Â Â Use of shared resources or employees
- Â Â Â Transactions involving branches or permanent establishments
All these must be priced fairly, as if they have been entered between unrelated businesses.
Comparability Analysis: Matching to the Market
To test whether a related-party deal is fair, businesses may need to carry out a comparability analysis. This means comparing the transaction with similar deals between unrelated companies. This helps confirm whether the price matches what’s usually charged in the open market.
If a fair market price can’t be found easily, businesses should use the best available method to estimate it.
Do All Businesses Need to Prepare Documents?
Not always. Businesses that qualify for small business relief or have no related-party transactions may not need to keep detailed records. But if there are controlled transactions, companies should still be ready to show they followed the Arm’s Length Principle.
Larger companies or those with complex group structures will likely need to keep detailed records to prove their pricing is fair. This inter alia include:
- Â Â Â Master file and Local file;
- Â Â Â Supporting documents for transfer pricing methods used;
- Â Â Â Copy of agreements and internal policies
You can gain more information on this from our tax agents in the UAE. Contact us on: +971502498194
How can Tax Gian Help?
Concepts like transfer pricing and the arm’s length principle can leave you muddled sometimes. You cannot go and manage to comply with transfer pricing rules without some assistance. Tax Gian provides you with that assistance. By guiding you and keeping you updated, we aim to help your business always comply.
