Do I need to Comply with Transfer Pricing Rules?

Transfer pricing refers to the prices of goods and services that are exchanged between companies under common control. Most tax jurisdictions around the world requires an arms length agreement for transactions made between related parties.

Put simply, transfer pricing accounting occurs when goods or services are exchanged between divisions of the same company. 

UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.

Sometime there maybe a different rate of tax for large multinationals that meet specific criteria set in reference to the “Pillar Two” of the OECD base erosion rules.

How Transfer Pricing Works 

A transfer price is used to determine the cost to charge another (internal) division, subsidiary, or holding company for services rendered. Typically transfer prices are reflective of the going market price for that good or service. Transfer pricing as practice extends to cross-border transactions as well as domestic ones. 

Effective but legal transfer pricing takes advantage of different tax regimes in different countries by raising transfer prices for goods and services produced in countries with lower tax rates.

Why Does Transfer Pricing Exist? 

Companies use transfer pricing to reduce the overall tax burden of the parent company. 

Transfer pricing rules seek to ensure that transactions between related parties (an individual or entity which has a pre-existing relationship with a business) are carried out on arm’s length terms. This is what is known as the ‘Arm’s Length Principle, which means that transfer prices between two commonly controlled entities must be treated as if they are two independent entities, and therefore negotiate at “arm’s length”. The OECD also has rules around this principle which is also published on their website and which the UAE is expected to follow.

Key Highlights on UAE Corporation Tax

  • UAE Corporation tax rate one of the lowest within the GCC region and along major economies
  • Tax applicable on profits above AED 375,000 and not below that
  • Standard Corporate Tax Rate is 9%
  • CT effective from 1 July 2023 from financial year 2023 ending on 30 June 2024
  • The financial year for businesses starting 1 January 2023 and ending 31 December 2023 will become subject to the tax beginning from 1 January 2024
  • Tax incentives offered to freezone businesses complying with all regulatory requirements will remain
  • Capital gains and dividends received by the companies in UAE from their qualifying shareholdings are also exempt from paying CT.
Transfer Pricing Documentation Requirements

As the UAE is expected to follow international standards when it comes to transfer pricing, the requirement of preparing documentation on the disclosure of transactions between related parties and connected persons is expected to be required. The OECD BEPS framework has documentation on the international standards required for this and also contain certain thresholds on the value of the transactions.

Corporation Tax - FAQ

Corporate Tax (CT) is a direct tax levied on the net income or profit of corporations and other businesses.

Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions. Most countries have a comprehensive CT regime, including most of the GCC Member States. 

0% for taxable income up to AED 375,000
9% for taxable income above AED 375,000

There is also a different tax rate for large multinationals that meet specific criteria set with reference to ‘Pillar Two’ of the OECD’s (Organisation for Economic Cooperation and Development’s) Base Erosion and Profit Shifting project.

Corporation tax is effective from 1st of June 2023 and it is expected that filing and payment deadlines will be 9 months after the financial year end.

Companies operating in Free Zones will be subject to UAE Corporation Tax, but the UAE Corporation Tax regime will continue to apply incentives offered to free zone businesses (providing they comply with the regulatory requirements and do not conduct business with mainland UAE).

Entities operating in Free Zones will be subject to a 0% CT rate on their taxable income. If an entity located in a Free Zone derives non-passive income from mainland UAE all its income will be subject to the general CT regime.

Under the upcoming UAE Corporation Tax regime, foreign companies will be subject to the corporate tax rate of 9% on annual taxable income exceeding AED 375,000.

To qualify for the 9% annual tax rate a foreign company operating in UAE has

‍Their Permanent Establishment (PE); or
Their Place of Effective Management; or
Their source of income.

On the 1st of June 2023, the corporate tax rate will be 9% of the net profit made by businesses in the AUE. In order to support small businesses and start-ups, the corporate tax rate will be ‘0’ % if the net profit is up to 3,75,000 AED.

The best way to prepare for the new Corporation Tax is to have accounting software which covers all the necessary requirements. The best accounting software for businesses currently is QuickBooks Accounting software.

On the 1st of June 2023, the corporate tax rate will be 9% of the net profit made by businesses in the UAE. In order to support small businesses and start-ups, the corporate tax rate will be ‘0’ % if the net profit is up to AED 375,000.