Understand the intricacies of Transfer Pricing regulations in the UAE with an overview of the CT Law, including the Arm’s Length Principle, Related Parties, Payments to Connected Persons, and Transfer Pricing Documentation requirements.
Overview of Transfer pricing regulations in the UAE?
The CT Law introduces a comprehensive TP regime which is broadly in line with the OECD TP Guidelines of 2022(OECD TPG). The CT Law provides more details in relation to the TP rules, specifically in the following articles:
- Article 34 – The Arm’s Length Principle;
- Article 35 – Related Parties and Control;
- Article 36 – Payments to Connected Persons; and
- Article 55 – Transfer Pricing Documentation.
Article 34- The Arm’s Length Principle
Typically, TP rules apply to cross-border arrangements entered between related parties. However, a key observation from the UAE TP regime is that it appears to apply broadly to any arrangements between related parties and connected persons. These rules should apply to all taxpayers, including corporations, partnerships, trusts, and any other taxpayer.
A transaction is considered to meet the arm’s length principle when the results of the transaction between related parties are consistent with the results of a transaction between unrelated parties.
Article 34 gives the FTA power to reallocate income or expenses between related parties and connected persons to clearly reflect taxable income (or to prevent the evasion of taxes).
Transfer pricing rules seek to ensure that transactions between Related Parties are carried out on arm’s length terms as if the transaction was carried out between independent parties.
Taxpayers may apply various TP methods to evaluate whether arrangements between related parties satisfy the arm’s length principle.
- Comparable Uncontrolled Price (CUP) method;
- Resale Price (RP) method;
- Cost-Plus (CP) method;
- Profit Split Method (residual or contribution) (PSM); and
- Transactional Net Margin Method (TNMM).
It does not prescribe any particular methodology or preference for the order in which methodologies might be applied to arrive at an arm’s length outcome. The most appropriate methodology should be adopted based on the facts and circumstances of the case. In this regard, all factors that might affect comparability must be evaluated prior to acceptance of any method. Specifically, comparability typically is evaluated by reference to functions, contractual terms, risks, economic conditions, business strategies, and the property or services that are the subject of the transaction
When the result of a transaction or arrangement between Related Parties falls beyond the arm’s length range, the Authority must modify the Taxable Income to reach the arm’s length result that best represents the facts and circumstances of the transaction or arrangement. Also, a corresponding adjustment to the Taxable Income of the Related Party shall also be made.
Article 35 – Related Parties and Control
The definition of related party and control is of utmost importance in the space of transfer pricing as the TP guidelines apply to transactions between related parties. So, this definition sits at the core of the TP domain.
Essentially, this definition can be divided into 3 relationships.
- Relationship among two or more natural persons
- Relationship between a natural person and a juridical person
- Relationship among two or more juridical persons
Firstly, two or more natural persons are considered related parties within the 4th degree of kinship or affiliation, including adoption or guardianship.
For instance parents, siblings, children, grandparents, grandchildren, uncles, aunts, and their children, great-grandparents, great-grandchildren, great-great-grandparents, and great-great-grandchildren.
Secondly, a natural person or ≥ 1 related party of a natural person are shareholder in juridical person, and the natural person, alone or together with its related party, directly or indirectly owns at least 50% ownership interest in the juridical person or controls the juridical person
Finally, “Related Parties” also refers to two or more juridical persons where one juridical person, alone or together with its Related Parties, directly or indirectly owns a 50% in the other juridical person, or controls the other juridical person, or any Person, alone or together with its Related Parties, directly or indirectly owns a 50% or greater ownership interest in or controls such two or more juridical persons.
Additionally, the following cases are also considered related parties
- A PE whether local or foreign
- Partners of an unincorporated partnership
- Trustee, founder, settlor or beneficiary of a trust or foundation
Now let us talk about the definition of control:
Control means the ability of a person to influence another Person, including the following specific cases:
- Ability to exercise at least 50% of the voting rights
- Ability to determine the composition of at least 50% of BOD
- Ability to determine, or exercise significant influence over, the conduct of the Business and Affairs.
Article 36 – Payments to Connected Persons
A Person shall be considered a Connected Person (CP) of a Taxable Person if that Person is:
- An owner of the Taxable Person.
- A director or officer of the Taxable Person.
- A Related Party of the owner or director
- Where the Taxable Person is a partner in an Unincorporated Partnership, a Connected Person is any other partner in that same Unincorporated Partnership, and any Person that is a Related Party of that partner.
Further, an owner of the Taxable Person is any natural person who directly or indirectly owns an ownership interest in the Taxable Person or Controls such Taxable Person. So, even holding 1 share is ownership as per the plain reading.
The consequences of not following the ALP for the transactions with connected person are as below:
Any payment or benefit provided by a Taxable Person to its CP shall be deductible only:
- If and to the extent the payment or benefit corresponds with the Market Value of the service, and
- Is incurred wholly and exclusively for the purposes of the Taxable Person’s Business.
These provisions shall not apply to any of the following:
- A Taxable Person whose shares are traded on a Recognised Stock Exchange.
- A Taxable Person is subject to the regulatory oversight of a competent authority in the State.
- Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.
Article 55- Transfer Pricing Documentation
So essentially there are two requirements that are mentioned in Article 55
- First is the annual disclosure form that has to be filed together with the Tax Return containing information regarding transactions and arrangements with its Related Parties and Connected Persons. Like Form 3CEB in India.
- Second is The Taxable Person who is undertaking related party and/or connected person transactions, needs to maintain a master file and a local file. The transaction limits to trigger the preparation of respective files are yet to be specified by the Authorities
Further, this article also elaborates on the time limit to submit the master file and the local file i.e. 30 days from the date of request by the FTA. Also, if any additional information is requested by the FTA to support the calculation of the ALP then such information is to be provided within a period of 30 days from the request by the FTA.
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