United Arab Emirates

UAE group entities may elect to form a tax group provided all the following conditions are met:

• The parent company, which must be UAE tax resident person (including a foreign legal entity with UAE POEM), directly or indirectly holds at least 95% of the (i) share capital, (ii) voting rights, and (iii) entitlement to profits and net assets.
• They have the same financial year and prepare the financial statements using the same accounting standards.
• Neither the parent company nor the subsidiary is an exempt person or a QFZP.

When a tax group is formed, the parent entity will be responsible for the administration, such as submission of one tax return and settlement of the tax liability for the tax group. 

Note that CT Group composition may be different from VAT Group composition for the same group structure as the grouping rules are different. 

Transfer pricing

The CT Law introduces transfer pricing rules and regulations. The transfer pricing regulations take immediate effect coinciding with the effective date of the corporate tax provisions. 

Arm’s-length principle

Both cross-border and domestic transactions and arrangements between related parties (including transactions undertaken by Free Zone entities) need to adhere to the arm’s-length standard (i.e. transactions must be undertaken as if they are carried out between independent parties under similar circumstances). 

Furthermore, payments and benefits provided to connected persons should be at market value, which should be determined by applying the arm’s-length standard.

Transfer pricing methods and their application

In order to determine the arm’s-length nature of the transactions between related parties, the CT Law prescribes five methods, broadly aligned with the OECD Transfer Pricing Guidelines. In case the taxable person can demonstrate that none of the prescribed methods can be reasonably applied, the taxpayer is allowed to apply any other method. In alignment with the OECD Transfer Pricing Guidelines, appropriate factors must be considered when applying the most appropriate method, namely (i) contractual terms, (ii) characteristics of the transaction, (iii) economic circumstances, (iv) functions, assets, and risks, and (v) business strategies.

Related parties

The definition of related parties is summarised below:

•     Two or more natural persons related up to fourth degree of kinship.
•     A natural person and a juridical person related by ownership (50% or greater) or control.
•     Two or more juridical persons related by ownership (50% or greater) or control.
•     A person and its PE or foreign PE.
•     Partners in the same unincorporated partnership.
•     Trustee, founder, settlor, or beneficiary of a trust or foundation and its related parties.

In this regard, the term ‘control’ has now been defined as the ability of a person to influence another person, including the ability to:

•     exercise 50% or more voting rights,
•     determine composition of 50% or more of the Board of Directors,
•     receive 50% or more profits, or
•     exercise significant influence over the conduct/affairs of another person.

The CT Law does not provide a clarification on how ’significant influence‘ is interpreted, and it is yet to be seen whether additional guidance will be issued and whether or not reference will be made to the interpretation as per accounting standards.

Connected persons

Any payment or benefit provided by a taxable person to a connected person should (i) correspond to the market value of the service or benefit and (ii) be incurred wholly and exclusively for business purposes in order for a deduction to be allowed. The market value should be determined by applying the arm’s-length standard. A specific exclusion on this limitation of deductibility applies in the event that the payment or benefit is provided by:

• a taxable person whose shares are traded on a recognised stock exchange,
• a taxable person subject to regulatory oversight of a competent state, authority, and
• any other person to be determined under a separate decision, which is yet to be issued.

The definition of ’connected persons‘ is any of the below:

• 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.
• Related party(ies) of any of the above.

Transfer pricing adjustments

The taxable income may be adjusted by the FTA if the results of the transaction between related parties do not fall within the arm’s-length range.

In the event of an adjustment made by the FTA or a taxable person to the taxable income, the authority will make a corresponding adjustment to the taxable income of the related party that is party to the transaction. On the other hand, where an adjustment is made by a foreign competent authority, the taxable person can apply for corresponding adjustment relief. Further guidance is awaited on the exact mechanism of implementation (e.g. potentially through a Mutual Agreement Procedure or other mechanism).

Advance Pricing Agreement (APA)

The CT Law provides a person the option to make an application for an APA (existing or proposed transactions). Detailed guidance in this regard will be prescribed by the FTA at a later date.

Transfer pricing documentation

1. TP Disclosure Form: 
   1. Threshold 
      1. Related party transactions - Aggregate value (as per financials / market value) exceeds AED 40 million, only transactions where per category value exceeds AED 4 million need to be disclosed.
      2. Connected person transactions - Aggregate value exceeds AED 500,000, only transactions where per category value exceeds AED 500,000 need to be disclosed.
   2. Timeline: Alongside CT return (within 9 months from the end of the relevant tax period).
2. Master File and Local File:
   1. Threshold: Taxable person meeting either of the following conditions:
      1. Constituent entity of a MNE group with a total consolidated group revenue of AED 3.15bn (approx. USD 850m) or more; or
      2. The Taxable Person's revenue in the relevant tax period is AED 200m (approx. USD 55m) or more.
   2. Timeline: Must be submitted within (30) thirty days following a request from the FTA.
3. Country-by-Country Report (“CbCR”)
   1. Threshold: UAE headquartered MNE Group with consolidated revenues above AED 3.15bn.
   2. Timeline: Within 12 months from the end of the reporting year of the MNE Group.