“Transfer Pricing Regulations in the UAE: Understanding the Arm’s Length Principle”
The UAE has recently introduced transfer pricing (TP) regulations in its new CT Law, which is now in effect. These regulations aim to ensure that both cross-border and domestic transactions between related parties, including those in Free Zone entities, adhere to the arm’s length standard. This standard requires transactions to be conducted as if they were between independent parties under similar circumstances.
To determine the arm’s length nature of transactions between related parties, the CT Law outlines five methods, which are in line with the OECD TP Guidelines. In cases where these methods cannot be reasonably applied, taxpayers are allowed to use other methods. The most appropriate method should take into consideration various factors such as contractual terms, transaction characteristics, economic circumstances, functions, assets, risks, and business strategies.
Under the UAE law, related parties are defined as two or more natural persons up to fourth degree of kinship, a natural person and a juridical person related by ownership (50% or more) or control, two or more juridical persons related by ownership (50% or more) or control, a person and its PE or foreign PE, partners in the same unincorporated partnership, or trustee, founder, settlor or beneficiary of a trust or foundation and its related parties.
The CT Law also applies the arm’s length principle to transactions between government entities and government-controlled entities, as well as between extractive or non-extractive natural resource businesses and other businesses. Any payment or benefit provided by a taxable person to a connected person should correspond to market value and be incurred for business purposes to be deductible. Connected persons are defined as a natural person who directly or indirectly owns an ownership interest or controls the taxable person, a director or officer of the taxable person, partners in the same unincorporated partnership, or related party(ies) of the above.
If the results of a transaction between related parties fall outside the arm’s length range, the taxable income may be adjusted by the Authority. In case of an adjustment, the Authority will make corresponding adjustments to the taxable income of the related party that is a party to the transaction.
In conclusion, the introduction of transfer pricing regulations in the UAE is aimed at ensuring that transactions between related parties are conducted at arm’s length, promoting fairness and consistency in tax compliance. Further guidance on the application of the arm’s length principle is expected to be issued by the Authority in the near future.
