The United Arab Emirates (UAE) stands out as a thriving financial and investment hub, attracting businesses globally. Understanding the intricacies of business operations and taxation in the UAE, especially in the context of transfer pricing, is paramount. The Federal Tax Authority (FTA) issued guidance in October 2023, shedding light on crucial areas relevant to the UAE's unique business landscape.
Transfer Pricing Essentials
Understanding Arms-Length Pricing:
The foundation of the UAE's Corporate Tax law is the Arms-Length Principle (ALP). This principle mandates that transactions between related parties and connected persons should mirror what independent parties would agree upon in similar circumstances. In essence, profits must be earned based on fair market values.
Relevant Financial Transactions:
Financial transactions between related parties and connected persons are subject to ALP to ensure fair and transparent dealings. These transactions include intra-group loans, cash pooling, guarantees, hedging, financial guarantees, captive insurance, intra-group services, and intangibles.
In-Depth Analysis of Key Financial Transactions
Intra-Group Loans:
Analyzing the terms of intra-group loans involves a comprehensive evaluation of factors such as issue date, tenure, currency, and interest rates. Credit risk assessment, referencing third-party loans, and calculating the arm’s length range are integral components.
Cash Pooling:
Cash pooling, a financial optimization technique, requires meticulous determination of arm’s length remuneration. Whether utilizing physical pooling or notional pooling, the appropriate reward for a cash pool leader should align with the activities and services provided.
Hedging:
Multinational enterprises (MNEs) can centralize risk through hedging instruments. The mechanism chosen, whether through a group treasury entity or natural hedges, must adhere to arm’s length conditions.
Financial Guarantees:
Evaluating the arm’s length conditions of a financial guarantee arrangement necessitates understanding the economic benefits received by the borrower. The guarantor's commitment should be in line with fair market practices.
Captive Insurance:
Captive insurance arrangements within a group of companies require a careful determination of arm’s length pricing. Utilizing methods like the Comparable Uncontrolled Price (CUP) or actuarial analysis ensures a fair valuation of insuring specific risks.
Intra-Group Services:
Analyzing transfer pricing for intra-group services involves assessing whether services have been performed and ensuring the charges align with arm’s length pricing. The Comparable Uncontrolled Price (CUP) method or cost-based methods are commonly employed.
Intangibles:
Determining arm’s length conditions and pricing for intangibles involves a meticulous process, including identifying intangibles, confirming contractual arrangements, characterizing actual controlled transactions, and establishing the arm’s length price.
Taxation Considerations in the UAE
Tax Group Formation:
UAE group entities may form a tax group if the parent company meets specific conditions, such as holding at least 95% of share capital, voting rights, and entitlement to profits. The parent entity assumes responsibility for tax administration.
Transfer Pricing Regulations:
The CT Law introduces transfer pricing rules aligned with the OECD Transfer Pricing Guidelines. Cross-border and domestic transactions must adhere to the arm’s length standard.
Connected Persons and Related Parties:
The definition of related parties encompasses natural persons, juridical persons, partnerships, and others. The concept of 'control' is defined, but 'significant influence' awaits further clarification.
Transfer Pricing Adjustments:
The FTA may adjust taxable income if transactions between related parties fall outside the arm’s length range. Advance Pricing Agreements (APAs) offer the option for predetermined pricing.
Tax Deductibility and Expenditures:
Certain expenditures are not tax-deductible, including fines, penalties, and non-qualifying charitable contributions. The UAE CT Law disallows/restricts deductions to ensure relief for income-generating expenses.
Interest Expenses and Capping Rules:
Net interest expense (NIE) up to 30% of EBITDA is deductible, with specific rules for capping. Interest capping does not apply to banks, insurance businesses, and certain regulated entities.
Net Operating Losses and Foreign Tax Credit:
Businesses can offset tax losses against subsequent income, with a limitation of 75%. A foreign tax credit is available but limited to the CT due on relevant income.
Small Business Relief and Group Transfers:
The UAE CT Law provides relief for small businesses meeting specific revenue thresholds. Group entities can transfer tax losses under certain conditions.
Free Trade Zones (FTZs):
Companies in FTZs are taxable persons subject to compliance. Qualifying Free Zone Persons (QFZPs) may enjoy a 0% CT rate on qualifying income.
Conclusion
In navigating the business and taxation landscape of the UAE, businesses must grasp the nuances of transfer pricing and taxation rules. Adhering to the Arms-Length Principle ensures fair dealings, while an understanding of specific financial transactions and taxation considerations provides a comprehensive guide for success in the dynamic environment of the UAE
