The new corporate tax regime, which was introduced in the UAE in 2023, turned out to be a game changer for businesses that are operating within the country. Not only does it outline the rate of interest at 9%, which the company needs to pay at the time when their income exceeds a certain threshold, but it has also introduced a system of transfer pricing aiming at providing fair pricing between businesses.

To answer the question of will transfer pricing rules apply to both domestic and cross-border transactions under UAE CT, there are some of the factors that need to be considered are as follows: The answer is that within the framework of UAE’s corporate tax, the transfer pricing applies with equal weight to both domestic and cross-border transactions between related parties.

Introduction

The introduction of corporate tax in the UAE in 2023 has forever changed the business landscape. At the core of all business proceedings concerned with corporate tax lies transfer pricing, a set of regulations ensuring fair pricing between related entities to prevent artificial profit shifting.

But before navigating the intricacies of profit shifting, the first hurdle is identifying the elusive related party’s involvement. That seems to be a simple task that can help unravel a tangled web of family ties, ownership structures, and hidden connections. The selection of related parties is a daunting task because this can include anyone from family to business partners to the business entities they own.

Understanding Transfer pricing rules

Transfer pricing is a crucial aspect of multinational business operations in the region of UAE. To ensure the set of regulations for transactions between related parties and entities with intertwined ownership or control that are conducted at a lengthy price range.

That means the prices should be like what independent companies would agree on in an open market, preventing the artificial shifting of profits for tax purposes. This has become quite important and necessary regarding globalization and increasing border trade between countries.

Application of the transfer pricing rules

The extension to enterprises in the UAE involved the application to transfer pricing regulations with related and connected persons regardless of where they live and where their present living location is within the UAE mainland free zones or foreign jurisdictions. The main objective is the maintenance of consistency and fairness in pricing agreements while promoting transparency in commercial transactions.

Related parties

In the UAE region, selecting parties for transfer pricing depends on the definition of related parties outlined in the Federal Tax Authority guidelines. 

Family ties include the relationships between two or more persons, including parents, siblings, and relatives like cousins and in-laws.

First-degree relationships include the person’s parents, wife, and children, and second-degree relationships include in-laws and siblings considered. The third-degree relationship includes great-grandchildren, uncles, and aunty nephews. In fourth-degree relationships, great-grandparents are included.

Ownerships might include individuals holding juridical positions. Control mechanisms- Entities have the power to appoint powerful personnel for key management, control financial or strategic decisions or exert significant influence over another entity regardless of ownership percentage.

Establishing an Arm's Length Charge Once the legitimacy of the service is established, the next step is to determine an appropriate charge for it. This charge should reflect what would be agreed upon between independent entities for a comparable service under similar conditions. Factors such as the nature of the service, the benefits derived, and market comparables play a crucial role in this determination.

Connected persons

Connected personas can be entities that can be distinguished between close relationships and that could influence pricing decisions. The significance of the influence these individual people have on the company’s management and operations. The connected Persons concept broadens the reach of transfer pricing regulations, ensuring that any payments or advantages extended by a taxable entity to its “Connected Persons” will be deductible only if the enterprise can demonstrate that such disbursements align with the "Arm's Length Principle" and that such expense corresponding with the “Market Value”.

Identifying the related parties or connected personas is crucial and helpful in UAE corporate tax:

Compliance is imperative to be updated with the current tax regulations, and transferring the pricing range is one of the major ways to ensure that businesses pass through the tax scanning machine without having any major issues.

Tax Optimization is the understanding of the entities that are related and allows people to get involved in businesses, structuring their transactions in a way that optimizes their burden of tax while secretly adhering to the arm’s length principle.

Documentation is one of the major strongholds of the business that is required in all tax and audit processes to make everything transparent for every transaction in the corporate tax law.

The Federal Tax Authority in the UAE offers a Transfer Pricing Guide, which is a roadmap to understand and implement transfer pricing regulations and ensure compliance. It helps provide practical guidance on identifying related parties and connected persons, pricing intra-group transactions, and effective application of the arm’s length principle. Businesses, whether engaging in domestic or cross-border transactions, should understand and comply with these transfer pricing rules to avoid tax disputes and foster a transparent business environment.

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