December 16, 2022
UAE introduces transfer pricing rules as part of Corporate Tax Law
On 9 December 2022, the United Arab Emirates (UAE) Ministry of Finance (MoF) released Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Corporate Tax Law or the Law) to enact a new corporate tax (CT) regime in the UAE. The Law has been supplemented with 158 Frequently Asked Questions (FAQs), also released on the same date.
The new CT regime will become effective for accounting periods beginning on or after 1 June 2023, with a headline rate of 9%. For groups with a December year end, this provides for a 12-month period to prepare and assess the impact ahead of the effective date. However, general anti-avoidance and transitional rules do apply from the date the law is published in the Official Gazette.
The Law includes TP rules that apply to UAE businesses with respect to related party and connected persons transactions.
This Alert summarizes the key features of the UAE TP rules. For more details on other aspects of the Law, see EY Global Tax Alert, UAE Ministry of Finance releases Corporate Tax Law: Detailed review, dated 12 December 2022.
For the purposes of determining taxable income, transactions and arrangements with related parties and connected persons will need to comply with the arm's-length principle. For purposes of the Law, any transaction or arrangement between an entity's exempt activity and its non-exempt activity will also need to comply with the arm's-length principle. The Law considers a transaction or arrangement with a related party or connected person to have met the arm's-length principle if the outcome of such transaction is consistent with the outcome that would have been realized if the parties to the same transaction were not related or otherwise connected.
The FAQs clarify that domestic transactions are in-scope of the UAE TP rules. Furthermore, the FAQs state that related party transactions within a tax group will generally be disregarded for UAE TP purposes.
Taxable persons will need to determine arm's-length prices using one or a combination of the following internationally recognized TP methods:
A taxable person may apply a TP method other than those listed above if the taxable person can reliably demonstrate that the above methods cannot be reasonably applied. Further, it is important to note that the UAE TP rules do not specify any particular order of preference for determining which TP method to apply.
In cases where the outcome of a transaction or arrangement between related parties does not meet the arm's-length standard, the Federal Tax Authority (FTA) may adjust a person's taxable income accordingly to achieve the arm's-length result that appropriately reflects the facts and circumstances of the transaction or arrangement. In such cases, corresponding adjustments may also be available.
Under the Law, parties to a transaction are considered related if they meet certain conditions. These conditions are broadly defined below:
For purposes of the Law, the term "control" can be broadly categorized as:
A person is construed to be "connected" to a business if the person meets at least one of the following conditions:
TP documentation requirements
Businesses that meet certain conditions (to be prescribed in a future Ministerial Decision) will be required to maintain TP documentation (i.e., master file and local file). The TP documentation must be submitted to the FTA within 30 days following a request. Similarly, the FTA may request taxpayers to provide additional supporting information within 30 days of a request.
The Law does not provide further details on the content to be included in the master file and the local file; however, based on information previously disclosed by the MoF as part of the UAE CT Public Consultation Document, the requirements are expected to be broadly aligned with OECD standards.
According to the Law, UAE businesses may need to file a disclosure together with their tax return, no later than nine months after the end of the financial year. The contents of the TP disclosure form are not specified in the Law and are expected to be announced later.
Country-by-Country Reporting (CbCR)
The Law does not refer to UAE CbCR requirements. However, it is expected that UAE CbCR requirements will remain applicable in accordance with Decision of the Council Resolution No. 44 of 2020: regulating the reports submitted by multinational companies.
Advance pricing agreements (APAs)
The Law states that UAE businesses may be able to apply for APAs. Additional guidance is expected from the FTA in this respect.
TP considerations for free zones
The Law introduces the concept of "Qualifying Free Zone Persons" (QFZP), which is broadly defined as a company or branch registered in a free zone that:
A QFZP is eligible to benefit from a 0% CT rate on its qualifying income. However, the QFZP will be required to comply with the arm's length principle and prepare and maintain appropriate TP documentation.
Consequences of noncompliance with TP requirements
UAE businesses failing to adhere to the TP requirements may face the risk of:
General anti-abuse and transitional rules
The Corporate Tax Law includes general anti-abuse rules (GAAR) intended to disregard transactions or arrangements undertaken with the main purpose of obtaining a CT advantage. These rules apply from the date the Law is published in the Official Gazette.
As part of its transitional rules, the CT Law also indicates that the opening balance sheet for CT purposes will be the closing accounting balance sheet for the financial year immediately before the first tax year.
Therefore, related party and connected person transactions undertaken during the transitional period are expected to comply with the arm's-length principle.
The above TP rules will have significant implications for UAE businesses. Businesses should therefore begin to evaluate potential implications on their operations, which may include the following aspects:
It is also important for UAE businesses to closely follow any other developments or guidance in this regard in the coming months.
For additional information with respect to this Alert, please contact the following:
EY Consulting LLC, Dubai
Ernst & Young LLP (United States), Middle East Tax Desk, New York