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Navigating Transfer Pricing in the UAE: Essential Strategies for Business Groups in the Face of Corporate Tax

 

The United Arab Emirates (UAE) has recently introduced a federal Corporate Tax (CT) law that will apply to all businesses and individuals conducting business activities under a commercial license in the UAE, including free zone businesses. The CT law will be effective for the financial years commencing on or after 01 June 2023 with a headline rate of 9%, one of the most competitive tax rates in the world¹².

The introduction of CT will have significant implications for business groups operating in the UAE, especially those with cross-border transactions or intra-group dealings. Such transactions may be subject to transfer pricing rules, which aim to ensure that the profits of related parties are allocated in accordance with the arm’s length principle, i.e., the price that would have been agreed by independent parties under comparable circumstances.

Transfer pricing rules are widely adopted by many countries around the world as a means of preventing tax avoidance and ensuring a fair distribution of tax revenues among jurisdictions. The UAE has not yet issued specific transfer pricing regulations, but it is expected that it will do so in the near future, following the international standards and best practices.

Therefore, business groups in the UAE should start preparing for the new CT regime and its potential impact on their transfer pricing policies and practices. Here are some essential strategies that can help them navigate the transfer pricing challenges in the UAE:

  • Conduct a transfer pricing risk assessment: Business groups should identify and assess their existing and potential transfer pricing risks, such as whether their intercompany transactions are at arm’s length, whether they have adequate documentation to support their transfer pricing positions, whether they are exposed to double taxation or penalties in case of a tax audit or dispute, etc.

  • Review and update their transfer pricing policies: Business groups should review and update their transfer pricing policies to ensure that they are aligned with the new CT regime and reflect the economic substance and value creation of their intercompany transactions. They should also consider adopting appropriate transfer pricing methods and benchmarks to determine arm’s length prices for their transactions.

  •  Prepare and maintain transfer pricing documentation: Business groups should prepare and maintain robust transfer pricing documentation to demonstrate that their intercompany transactions are at arm’s length and comply with the applicable tax laws and regulations. They should also follow the relevant documentation standards and requirements that may be issued by the UAE authorities in due course.

  •  Seek advance certainty and dispute resolution: Business groups should seek advance certainty and dispute resolution mechanisms to avoid or resolve any potential transfer pricing disputes with the UAE tax authorities or other jurisdictions. They should also monitor the developments and updates on the transfer pricing rules and guidance in the UAE and other relevant countries.

By following these strategies, business groups in the UAE can effectively manage their transfer pricing risks and opportunities in the face of the new CT regime. They can also enhance their tax compliance and governance, as well as their reputation and competitiveness in the market.

The documents required for Corporate Tax registration and Corporate Group Tax in UAE:

  1. Copy of Trade License (must not be expired).
  2.  Passport copy of the owner/partners who own the license (must not be expired).
  3.  Emirates ID of the owner/partners who own the license (must not be expired).
  4.  Memorandum of Association (MOA) or Power of Attorney (POA).
  5.  Concerned person’s contact details (Mobile Number and E-mail).
  6.  Contact details of the company (complete address and P.O. Box).
  7.  Notice signed by the parent company and all subsidiaries to form a Corporate Tax Group, if applicable.
  8.  Proof of ownership and control of the parent company over its subsidiaries, if applicable.

Source: finexcube.com

Article 40:

According to the Article 40 of the UAE Corporate Tax Law deals with Tax Groups. A Tax Group is when two or more Taxable Persons are treated as a single Taxable Person. This is subject to certain conditions to be satisfied as laid down under Article 40 of the UAE Corporate Tax Law.

Source: Finexcube.com

According to sources, the conditions for forming a Tax Group in UAE are:

  • All the companies in the Group should be UAE Resident companies
  • The parent entity must hold at least 95% of the share capital and voting rights of its subsidiaries
  • The parent company or its subsidiaries should not be an Exempt Person or a Free Zone Entity that benefits from the 0% corporate tax rate
  • The companies should have the same financial year and prepare the financial statements using the same accounting standards

Source: Finexcube.com

Benefits of forming a Corporate Tax Group in UAE are:

  • The Corporate Tax Group can benefit from better tax planning and reduction of compliance costs.
  • The Corporate Tax Group can offset tax losses and profits within the group.
  • The inter-company balances and transactions between group entities should typically be eliminated on consolidation, thus reducing the transfer pricing compliance obligations.
  • The parent entity will be responsible for the administration such as submission of one tax return and settlement of the tax liability for the Corporate Tax Group.

Source : Finexcube.com

To apply to form a Corporate Tax Group in UAE, you need to follow these steps¹²³:

  • Check if you meet the criteria for forming a Corporate Tax Group, such as being UAE resident companies, having the same financial year, and having at least 95% ownership by the parent company.
  • Submit a notice signed by the parent company and all subsidiaries to the Federal Tax Authority (FTA). The notice should include the details of the parent company and the subsidiaries, such as their names, addresses, and tax registration numbers.
  • Wait for the approval from the FTA. The FTA may request additional information or documents to verify your eligibility for forming a Corporate Tax Group.
  • After approval, the Corporate Tax Group will be considered as a single taxable person for Corporate Tax purposes. The parent company will be responsible for filing and paying the Corporate Tax on behalf of the group.

Source: Finexcube.com

 

– Please note that this is not a professional or legal advice and you should consult finexcube officially or a qualified expert before relying on it. Above is education purpose only.

 

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