Transfer pricing is no longer just a corporate tax buzzword—it’s a vital part of managing your international transactions. As the UAE enforces strict compliance under the new Corporate Tax Law, it’s essential for businesses to stay ahead of the curve to avoid penalties and optimize profitability. Here’s what you need to know.
What is Transfer Pricing and Why Does it Matter?
Transfer pricing refers to the pricing of goods, services, or intangible assets between related parties within a corporate group. The UAE mandates that transactions between affiliated entities must comply with arm’s length principles—meaning they should reflect market conditions. Failure to follow these rules can lead to audits and hefty fines.
Overview of UAE Transfer Pricing Rules
On 31 January 2022, the Ministry of Finance of UAE announced the introduction of Federal Corporate Tax on business profits, starting from 1 June 2023. On 9 December 2022, the UAE’s Ministry of Finance 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 regime in the UAE. Chapter 10 (“Transactions with Related Parties and Connected Persons”) of the Federal Decree Law No. 47 deals with the Transfer Pricing Principles.
The Ministry of Finance, on 27 April 2023, released Ministerial Decision No. 97 of 2023 ‘Requirements for Maintaining Transfer Pricing Documentation’ containing the provisions for maintaining a Master File and Local File in compliance with the requirements under the UAE Corporate Tax regime. This documentation is mandatory for companies meeting certain thresholds, ensuring transparency and fair tax practices.
Is Transfer Pricing Documentation Required for My Business?
Yes, if your business meets any of the following conditions:
- If your business is a Constituent Company of a Multinational Enterprise (MNE) Group with total consolidated group revenue of AED 3.15 billion or more in the relevant tax period (as per Cabinet Decision No. 44 of 2020).
- If your business generates AED 200 million or more in revenue in the relevant tax period.
If either of these conditions applies to your business, you are required to maintain both a Master File and Local File in accordance with Clause (2) of Article (55) of the Corporate Tax Law for the relevant tax period.
What If My Revenue Falls Below the Threshold Limit?
Even if your revenue falls below this threshold, your transactions must still comply with arm’s length principles. While formal documentation isn’t mandatory, it’s strongly recommended to perform a benchmarking study to avoid risks and prove compliance. A benchmarking study helps you demonstrate that your intercompany transactions are conducted at fair market value.
What Happens if I Don’t Comply with Transfer Pricing Rules?
Non-compliance can result in significant penalties. If you fail to maintain required documentation or conduct a benchmarking study, you could face fines of AED 10,000 per violation. Repeated violations within 24 months can incur even higher penalties—AED 20,000 per violation.
Complexities in UAE Transfer Pricing
UAE businesses face unique challenges in transfer pricing compliance. The presence of free zone entities, lack of detailed industry-specific guidelines from the FTA, and the initial year of corporate tax practice create added complexities. Companies often need to rely on OECD guidelines for interpretation, especially for complex transactions such as loans, cash pools, and cross-border services. Additionally, navigating the local regulations while managing global compliance can be overwhelming for businesses without the right expertise.
How Can JAKS Help My Business Stay Compliant?
At JAKS, we specialize in helping businesses of all sizes navigate the complexities of transfer pricing. Our benchmarking studies and transfer pricing documentation services ensure your business is fully compliant with UAE tax laws. We’ve successfully assisted multi-billion-dollar organizations, mitigating risks and enhancing profitability.
By partnering with JAKS, you gain access to a team of experts who will guide you through every step of the process—from setting fair market pricing to preparing necessary documentation and conducting benchmarking studies. Additionally, we have access to internationally accepted databases, such as TP Catalyst, which provide reliable and comprehensive data for conducting accurate benchmarking studies. We’ll help you optimize your tax strategy and ensure that your transfer pricing policies are aligned with global best practices.
