Transfer Pricing Documentation under UAE Corporate Tax (“CT”) Law

Background

The United Arab Emirates’ (“UAE”) Ministry of Finance (“MoF”) issued the Federal Decree-Law No. 47 of 2022 (“UAE CT Law”) on 3 October 2022 (published in public domain in December 2022).

Article 55 of the UAE CT Law lays down the provisions relating to the transfer pricing documentation.

Recently, the MOF has issued Ministerial Decision No. 97 of 2023 (“the Decision”) in connection with the maintenance of the Transfer Pricing Documentation (i.e. the Local File and the Master File) by the taxable persons.

The Decisions essentially deals with prescribing (i) the threshold to trigger the compliance requirements and (ii) transactions or arrangements which shall be disclosed in the Local File.

Who shall prepare and maintain the Master File and Local File?

Taxable Person that meets any of the below threshold:

a)
a) It is part of the Multinational Enterprises (“MNE”) Group which reports total consolidated revenues of AED 3.15 million or more in the relevant Tax Period, OR

b)
b) It has reported a standalone revenue of AED 200 million or more in the relevant Tax Period.

Which related party transactions / payments or benefits to connected person shall be disclosed in the Local File:

Subject to the specific exclusions, the Taxable Person must include the transactions or arrangements with the following parties:

a)
Non-Resident Persons

b)
Exempt Persons

c)
Resident persons claiming small business relief

d)
Resident Persons whose income is subject to a different Corporate Tax rate from that applicable to the Taxable Person's income

Which related party transactions / payments or benefits to connected person can be excluded from the Local File:

The Taxable Person may not include transactions or arrangements with the following parties:

a)
Resident Persons other than those specified in (b), (c) and (d) above

b)
Natural persons, provided the parties in the transaction or arrangement are acting independently of each other

c)
Juridical person considered as Related Party or Connected Person solely due to being a partner in an Unincorporated Partnership, provided the parties in the transaction or arrangement are acting independently of each other

d)
d) Permanent Establishments (“PE”) of Non-Resident Persons in the State with the same Corporate Tax rate as the Taxable Person's income

The Decision also provides guidance in relation to situations under which parties to the transaction would be treated as acting independently.

PB Comments

●
The Decision would apply to all the taxable persons including the Exempt Person having taxable business activities as well as Qualifying Free Zone Person (unless specifically covered by future Decisions).

●
Provisions relating to arm’s length principle (i.e. undertaking benchmarking analysis to justify the pricing) would continue to apply irrespective of relief under this Decision.

●
Whilst transactions between related resident entities (subject to same tax rate) enjoy the relief from disclosure requirements (and thus from other documentation requirements), transactions with loss making related entities would be recommended to be disclosed in the Local File, even though the entities would be subject to same rate of corporate tax.

●
Tax payers shall put in place reasonable measures to ensure that the transactions with PE of the non-resident (being subject to tax at the same rate) are actually attributable to such PE. In case the transaction is not found to be attributable to the PE, administrative penalties could be levied for non-disclosure.

●
Even though the Decision waives the disclosure (and thus also the documentation requirements) of certain related party transactions or payments / benefits to connected persons in the Local File, the same may be required to be disclosed in the Disclosure Form, which will be prescribed in coming months.

The above may also apply in the cases where tax payers are not obliged to prepare and maintain the Local File.

●
The Decision could be said to be providing relief from disclosure requirements (and thus from other documentation requirements) in relation to the transactions with key officers of the entity, who are not having comprehensive control over the entity.

●
The format and more specifically other contents of the Local File and Master File shall be prescribed by the Federal Tax Authority. Likely, the same shall be aligned with the OECD Transfer Pricing Guidelines.