Transfer Pricing refers to the pricing of arrangements between Related Parties or Connected Persons. These transactions are now subject to specific provisions under the UAE Corporate Tax Law, which requires adherence to the Arm’s Length Principle. This article outlines what constitutes Transfer Pricing, identifies who is in scope, and explains how businesses should approach compliance through proper identification, analysis, and pricing of controlled transactions.
I. Transfer Pricing Defined
In the context of the UAE Corporate Tax Law, Transfer Pricing governs the pricing of transactions between entities or individuals that share a relationship likely to influence the terms of those dealings. These include both cross-border and domestic transactions involving goods, services, intangible assets, and financial arrangements. The objective of Transfer Pricing regulation is to ensure that income is appropriately allocated and taxed in the jurisdiction where economic activity occurs.
Transfer Pricing is fundamentally a tax concept but carries implications in accounting, compliance, and risk management. When independent entities transact, market forces generally dictate prices and terms. However, for Related Parties or Connected Persons—such as companies within the same corporate group or individuals with significant control or ownership stakes—this is not necessarily the case. In these scenarios, prices may be set in a manner that shifts profits across borders or jurisdictions, impacting tax liabilities.
To address this, the UAE has implemented the Arm’s Length Principle through Article 34 of the Corporate Tax Law and Ministerial Decision No. 97 of 2023, meeting international standards. This principle requires that all Controlled Transactions be priced as if they occurred between unrelated parties under comparable circumstances.
II. Persons and Transactions in Scope
Entities in scope include those engaging in transactions with Related Parties or Connected Persons. A Related Party is defined under Article 35 of the Corporate Tax Law and includes entities and individuals connected through ownership, control, or kinship. Connected Persons typically include individuals with substantial influence over a company, such as directors or partners.
The rules apply regardless of whether a written agreement exists and irrespective of whether the parties are UAE residents. Even exempt or small-business-relief entities must adhere to the Arm’s Length Principle when engaging in Controlled Transactions, although they may be exempt from documentation requirements.
Controlled Transactions can cover a wide array of activities, including the sale of goods, provision of services, use of intellectual property, and financing arrangements. These may also extend to dealings involving a Permanent Establishment.
III. Applying the Arm’s Length Principle: A Three-Step Process
Step 1: Identification and Comparability Analysis
Businesses must first identify Related Parties and the transactions in question. This involves a thorough understanding of the commercial and financial relationships in play. The comparability analysis then assesses whether these Controlled Transactions mirror what would be expected if the parties were independent. This includes examining functions performed, risks assumed, and assets used (collectively known as a Functional Analysis).
Step 2: Selection of Method
There are five internationally recognised methods for determining whether pricing is at arm’s length:
- Comparable Uncontrolled Price (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
Traditional transaction methods (CUP, RPM, CPM) are preferred when direct price comparisons are possible. In contrast, profit-based methods (TNMM, PSM) are used where transactions involve complex or integrated activities with limited comparables.
Step 3: Determining the Arm’s Length Price
The selected method is then applied to establish the appropriate price or margin. This requires choosing a tested party—typically the simpler party in terms of functions and risks—to ensure reliability of available data. Both internal and external comparables may be used to assess whether the terms of the transaction align with market conditions.
IV. Conclusion
For companies operating in the UAE, Transfer Pricing is no longer an optional consideration. The introduction of clear legal obligations under the Corporate Tax framework necessitates a structured and well-documented approach to intra-group transactions. Businesses must ensure that all Controlled Transactions are properly identified, analysed, and priced in accordance with the Arm’s Length Principle. Proactive compliance—through accurate delineation of transactions, robust functional analysis, and appropriate method selection—will be key in mitigating tax risk and ensuring audit readiness.
