New Transfer Pricing Scheme in the United Arab Emirates

The new UAE CT scheme imposes significant restrictions on TP activities, which also apply from the effective date of the CT legislation. In general, these follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (PCD, 7.8).

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Arm’s Length Principle

·????????Under the new regime, the internationally recognized ‘arm’s length’ principle will be applied to transactions and arrangements between ‘Related Parties’ and with ‘Connected Persons’ (PCD, 7.1). These terms are defined below.

·????????The arm’s length principle states that the price agreed in a transaction between two related parties must be the same as the price agreed in a comparable transaction between two unrelated parties. In line with this, the FAQ notes that ‘various articles in the [new] Corporate Tax Law require that the consideration of transactions with Related Parties and Connected Persons needs to be determined by reference to their “Market Value”’ (FAQ, 96)

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Related Parties

·????????A related party is an individual or entity who has a pre-existing relationship with a business that is within the scope of the UAE CT regime through ownership, control or kinship (in the case of natural persons) (PCD, 7.3). For CT purposes, these are defined as the following:

-??????Two or more individuals related to the fourth degree of kinship or affiliation, including by birth, marriage, adoption or guardianship

-??????An individual and a legal entity where alone, or together with a related party, the individual directly or indirectly owns a 50% or greater share in, or controls, the legal entity

-??????Two or more legal entities where one legal entity alone, or together with a related party, directly or indirectly owns a 50% or greater share in, or controls, the other legal entity

-??????Two or more legal entities if a taxpayer alone, or with a related party, directly or indirectly owns a 50% share of each or controls them

-??????A taxpayer and its branch or permanent establishment

-??????Partners in the same unincorporated partnership

-??????Exempt and non-exempt business activities of the same person

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Connected Persons

·????????Connected person is:

-??????An individual who directly or indirectly has an ownership interest in, or controls, the

taxable person

-??????A director or officer of the taxable person

-??????An individual related to the owner, director or officer of the taxable person to the fourth

degree of kinship or affiliation, including by birth, marriage, adoption or guardianship

-??????Where the taxable person is a partner in an unincorporated partnership, any other partner

in the same partnership

-??????A Related Party of any of the above (PCD, 7.7).

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Obligations

·????????All taxpayers will be obligated to demonstrate, via specific filing procedures, that their transactions with Related Parties and Connected Persons comply with the arm’s length principle. In particular:

-??????Where relevant, businesses will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons (PCD, 7.11).

-??????A business will also need to maintain a ‘Master’ and ‘Local’ file (with format and content consistent with the requirements prescribed under OECD BEPS Action 13) where the arm’s length value of their Related Party transactions exceeds a certain threshold in the relevant tax period (PCD, 7.12).

·????????Additionally, payments provided by a business to its Connected Persons will be deductible only if the business demonstrates that the payment or benefit:

-??????Corresponds with the market value of the service provided; and

-??????Incurred wholly & exclusively for the purposes of the taxpayer’s business (PCD, 7.6).