UAE Ministry of Finance announces entities required to maintain transfer pricing documentation
Together with the new Corporate Income Tax (CIT) regime, the United Arab Emirates (UAE) will also introduce transfer pricing (TP) regulations. These regulations will enter into effect for financial years starting on or after 1 June 2023.
According to the CIT law1, all taxpayers must ensure that transactions with related parties and connected persons comply with the arm’s length principle. The arm’s length principle aims to ensure that the results of a transaction or arrangement between related parties are consistent with the results that would have been realised if independent parties had engaged in a similar transaction or arrangement under similar circumstances.
The CIT law further also stipulates that taxpayers must maintain TP documentation (i.e., a master file and local file), if they meet certain conditions prescribed by the Minister of Finance (MOF).
On 11 May 2023, the MOF published Ministerial Decision No. (97) of 20232 which announces the requirements for maintaining TP documentation.
A taxable person must maintain both a master file and a local file if they meet either of the following conditions:
- The taxable person is a constituent entity of a multinational enterprises group (MNE Group) with a total consolidated group revenue of AED 3.15 billion or more in the relevant tax period; or
- The taxable person's revenue in the relevant tax period is AED 200 million or more.
The revenue threshold of AED 200 million is relatively high compared to other jurisdictions. This is in line with the UAE’s policy objective of minimizing tax compliance obligations for smaller businesses. Taxpayers that are part of an MNE Group in scope of Pillar Two3 will have to maintain TP documentation regardless of the entity’s revenue.
The master file provides an overview of the global operations, business activities, and TP policies of the MNE group as a whole. It contains standardized information that helps tax authorities understand the MNE's value chain, its intercompany transactions, and the allocation of income and economic activity across different jurisdictions. The purpose of the master file is to provide a comprehensive picture of the MNE's global operations and TP practices to facilitate consistent and efficient TP audits by tax authorities.
The local file provides detailed information specific to a particular country or jurisdiction where the MNE operates. It focuses on the local entity's intercompany transactions and TP arrangements, as well as the economic analysis supporting the arm's length nature of those transactions. The purpose of the local file is to provide specific information about the local entity's operations, TP arrangements, and the economic analysis supporting the transfer prices.
Taxpayers will have to include transactions or arrangements with all of the following related parties and connected persons in the local file:
- Non-resident persons;
- Exempt Persons (e.g., government entities, government-controlled entities, qualifying public benefit entities, etc.);
- Entities that have elected for small business relief; and
- Qualifying free zone persons.
Taxpayers will need to exclude the following transactions or arrangements with related parties and connected persons from the local file:
- Transactions with resident persons, except for transactions with exempt persons, entities that have elected for small business relief and qualifying free zone persons;
- A natural person, provided that the parties to the transaction or arrangement are acting as if they were independent of each other;
- A juridical person that is considered to be a related party or a connected person solely by virtue of being a partner in an unincorporated partnership, provided that the parties to the transaction or arrangement are acting as if they were independent of each other; and
- Transactions with a permanent establishment of a non-resident person, whose income is subject to the same tax rate.
In addition to the master file and local file, taxpayers will also have to submit a disclosure form when filing their annual tax return. The disclosure form includes information regarding a taxpayer’s transactions with related parties and connected persons. It is currently uncertain whether all taxpayers will be required to submit a disclosure form or whether this obligation will also be subject to a certain threshold.
Taxpayers will have to maintain TP documentation in the form prescribed by the Federal Tax Authority (FTA). Ministerial Decision No. (97) of 2023 further confirms that the FTA will issue guidelines for maintaining transfer pricing documentation.
Key takeawayUAE taxpayers will be required to maintain transfer pricing documentation if their revenues exceed AED 200 million, or if they are part of an MNE Group in scope of Pillar Two.
1 Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses
2 Ministerial Decision No. (97) of 2023 Requirements for Maintaining Transfer Pricing Documentation for the Purposes of Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses
3 The Pillar Two Model Rules (also referred to as the “Anti Global Base Erosion” or “GloBE” Rules) are designed to ensure large MNEs pay a minimum level of tax (15%) on the income arising in each jurisdiction where they operate.