The new tax system for corporations that was introduced within the UAE in 2023 will be an important change for companies that operate within the country. It not only outlines the interest rate (9 %) that businesses are required to pay if their income exceeds a certain amount (AED 375,000) however, it has established transfer pricing – an initiative to encourage an equitable pricing system between businesses. But the problem for entrepreneurs is whether these transfer pricing regulations are designed only for international transactions or extend their scope to the borders of the UAE too?
The Solution
The answer is that in the framework of UAE’s corporate tax transfer pricing is given the same weight for trans-border and domestic transactions between closely-related entities. The process of implementing this rule will ensure the business activities are in line with the tax laws in the UAE. Corporate tax consultants in Dubai can assist businesses in navigating the complexities of transfer pricing regulations in the UAE. In this article, we’ll explore how they can help when transfer pricing is given equal importance for both cross-border and domestic transactions between closely-related entities:
Understanding Transfer Pricing Rules
Transfer pricing rules are designed the warrant all transactions that take place between Related Parties are executed in an arm’s-length manner like if the transaction were executed between two different parties.
For example: The Dubai-based Company sells its signature chocolates to its sister business, Company B, also located in Dubai for a price substantially below the market value. This is an apparent internal deal that raises taxes. In the event of undervaluing the sweets Company A reduces its tax-deductible income within the UAE.
The UAE transfer pricing rules serve as a protection against these methods, stopping all attempts to alter the tax rate and providing an equitable tax environment for all companies regardless of geographic position.
Application of the Transfer Pricing Rules
The implementation of transfer pricing regulations is applicable to companies located in the UAE that are involved in dealing that involve Related Parties or Connected People regardless of where they are on the UAE mainland and Free Zones or outside of foreign jurisdictions. The aim is to ensure an even and fair pricing agreements, while also promoting transparency when it comes to commercial transactions.
Related Parties
It is the UAE Corporate Tax Law defines “related parties” broadly. It covers entities that are under common control, for example by the Kinship (parent as well as sister corporations) ownership, ownership, or control, regardless of residency status within the UAE.
- Kinship
Kinship is a term used to describe situations in which people are connected by blood or legal ties such as spouses, parents, children, siblings, and other extended family members in addition to the adoption process or legal guardianship.
- Ownership
Ownership refers to situations where the relatives of the natural person own the shares of a legally-constituted entity and the person is either on his own or with other related persons, has an indirect or direct ownership stake at least 50% in the entity.
- Control
Control is the term used to describe influence on an individual by another that is based on the possession of more than 50% of voting rights or being able to take 50 percent or more of profits of an entity or individual.
For instance: Company R, a resident of the UAE has licensed an equipment for use by Company S, situated in the nation X that allows it to conduct the day-to-day operations of the country of X. Both parties have signed an agreement on royalty that allows company R up to 50% the profits earned by Company S by using the machine within country X. This creates Company R and S the same entity through “control” in the sense that a person can enjoy at least 50% of the profits of a different person.
Connected Persons
Separated from Related Parties, Connected Persons are entities that have a close connection which could affect pricing decisions. This can include people who have significant influence over the business’s operations or management, or companies controlled by the same people, such as business owners, directors, officers, etc.
The notion of Connected Persons expands the scope of the transfer pricing rules and ensures that any benefits or benefits offered by a tax-paying entity in the “Connected Persons” will be tax-deductible only if the company can prove that the payments correspond to those of the “Arm’s Length Rule” and that the cost is in line with “Market Value”.
Key Takeaways
The Federal Tax Authority (FTA) in the UAE provides the Transfer Pricing Guide, a road map to understand the transfer pricing rules and making sure that they are in compliance. It offers practical advice on the identification of related parties and related individuals, pricing intra-group transactions as well as the efficient application of the arm’s-length principle and more. Companies involved in international or domestic transactions must be aware of and adhere to these rules on pricing transfers to prevent tax disputes and create an open and transparent business environment.
How can ebs chartered accountants benefit you?
ebs chartered accountants, one of the most reputable accounting and auditing companies in the UAE and can help in obtaining all tax-related issues taken care of. Corporate tax was recently introduced by the government that could be daunting for businesses located in the UAE, however, the tax specialists can benefit you in solving tax-related problems. Our tax experts can benefit from you becoming a member of the CT regime if you’re qualified as per the rules and, in addition we will benefit you to manage your company tax issues easily.
FAQS
Do the rules on transfer pricing apply to transactions conducted within the UAE?
Yes, the rules on transfer pricing are applicable to domestic as well as cross-border transactions within the UAE Corporate Tax system.
Do you have specific guidelines to cross-border transactions within the UAE?
Yes it is true that the UAE has regulations in place that are detailed regarding the transfer price for cross-border transactions to stop tax avoidance.
What happens when a company is not in compliance with the transfer pricing regulations within the UAE?
Failure to comply could result in penalties, fines and even taxes being audited by the tax authority in UAE.
What can businesses do to warrant they’re in compliance to transfer pricing regulations in the UAE?
Companies must conduct the proper documentation, conduct an arm’s length pricing analysis and adhere to the rules set forth by UAE taxes authorities.