Do transactions between a UAE company and its foreign parent need transfer pricing?

Article 34 – Arm’s Length Principle 1. In determining Taxable Income, transactions and arrangements between Related Parties must meet the arm’s length standard as specified in Clauses 2, 3, 4 and 5 of this Article and any conditions that may be prescribed in a decision issued by the Authority. 2. A transaction or arrangement between Related Parties meets the arm’s length standard if the results of the transaction or arrangement are consistent with the results that would have been realised if Persons who were not Related Parties had engaged in a similar transaction or arrangement under similar circumstances. 3. The arm’s length result of a transaction or arrangement between Related Parties must be determined by applying one or a combination of the following transfer pricing methods: a. The comparable uncontrolled price method. b. The resale price method. c. The cost-plus method. d. The transactional net margin method. e. The transactional profit split method. 4. The Taxable Person may apply any transfer pricing method other than the methods listed in Clause 3 of this Article where the Taxable Person can demonstrate that none of the above methods can be reasonably applied to determine an arm’s length result and that any such other transfer pricing method used satisfies the condition of Clause 2 of this Article. 5. The choice and application of a transfer pricing method or combination of transfer pricing methods under Clause 3 or 4 of this Article must be made having regard to the most reliable transfer pricing method and taking into account following factors: a. The contractual terms of the transaction or arrangement. b. The characteristics of the transaction or arrangement. Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 40 c. The economic circumstances in which the transaction or arrangement is conducted. d. The functions performed, assets employed, and risks assumed by the Related Parties entering into the transaction or arrangement. e. The business strategies employed by the Related Parties entering into the transaction or arrangement. 6. The Authority’s examination as to whether income and expenditures resulting from the Taxable Person’s relevant transactions or arrangements meet the arm’s length standard shall be based on the transfer pricing method used by the Taxable Person in accordance with Clause 3 or 4 of this Article, provided such transfer pricing method is appropriate having regard to the factors mentioned in Clause 5 of this Article. 7. Application of the selected transfer pricing method or combination of transfer pricing methods in accordance with Clause 3 or 4 of this Article may result in an arm’s length range of financial results or indicators acceptable for establishing the arm’s length result of a transaction or arrangement between Related Parties, subject to any conditions specified in a decision issued by the Authority. 8. Where the result of the transaction or arrangement between Related Parties does not fall within the arm’s length range, the Authority shall adjust the Taxable Income to achieve the arm’s length result that best reflects the facts and circumstances of the transaction or arrangement. 9. Where the Authority makes an adjustment to the Taxable Income pursuant to Clause 8 of this Article, the Authority shall rely on information that can or will be made available to the Taxable Person. 10. Where the Authority or a Taxable Person adjusts the Taxable Income for a transaction or arrangement to meet the arm’s length standard, the Authority shall make a corresponding adjustment to the Taxable Income of the Related Party that is party to the relevant transaction or arrangement. 11. Where a foreign competent authority makes an adjustment to a transaction or arrangement involving a Taxable Person to meet the arm’s length standard, such Taxable Person can make an application to the Authority to make a corresponding adjustment to its Taxable Income. Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 41

Article 35 – Related Parties and Control 1. For the purposes of this Decree-Law, “Related Parties” means any of the following: a. Two or more natural persons who are related within the fourth degree of kinship or affiliation, including by way of adoption or guardianship. b. A natural person and a juridical person where: 1) the natural person or one or more Related Parties of the natural person are shareholders in the juridical person, and the natural person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in the juridical person; or 2) the natural person, alone or together with its Related Parties, directly or indirectly Controls the juridical person. c. Two or more juridical persons where: 1) one juridical person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in the other juridical person; 2) one juridical person, alone or together with its Related Parties, directly or indirectly Controls the other juridical person; or 3) any Person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in or Controls such two or more juridical persons. d. A Person and its Permanent Establishment or Foreign Permanent Establishment. e. Two or more Persons that are partners in the same Unincorporated Partnership. f. A Person who is the trustee, founder, settlor or beneficiary of a trust or foundation, and its Related Parties. 2. For the purposes of this Decree-Law, “Control” means the ability of a Person, whether in their own right or by agreement or otherwise to influence another Person, including: a. The ability to exercise 50% (fifty percent) or more of the voting rights of another Person. Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 42 b. The ability to determine the composition of 50% (fifty percent) or more of the Board of directors of another Person. c. The ability to receive 50% (fifty percent) or more of the profits of another Person. d. The ability to determine, or exercise significant influence over, the conduct of the Business and affairs of another Person.

Therefore, the non-arm’s length pricing of goods transferred between Related Parties has shifted profits between jurisdictions, resulting in a tax benefit for this Group. These transactions would need to be adjusted in line with the Arm’s Length Principle and reflect the Market Value. As a consequence, the total tax payable by AB Group will increase. 4.4. Scope of the Transfer Pricing rules The Transfer Pricing provisions in the UAE apply to transactions or arrangements between Persons who are Related Parties or Connected Persons. Exempt entities or entities which have elected for the small business relief, as well as standalone entities with no Related Party transactions are subject to Transfer Pricing rules and need to meet the Arm’s Length Principle in case of Controlled Transactions but are not required to prepare and keep TP Documentation. 4.4.1. Related Parties and Connected Persons 4.4.1.1. Related Parties Transfer Pricing rules apply to Related Parties, which are defined under Article 35 of the Corporate Tax Law as any associated Persons, according to a specified degree of association. This association means pre-existing relationship with another Person through kinship (in case of natural persons), ownership or Control, regardless of whether that other Person is resident or not in the UAE. The criteria for determining association between Related Parties have been categorised and detailed below: 4.4.1.2. Kinship or affiliation The definition of kinship or affiliation covers the relationship of two or more individuals who are related up to the fourth degree of kinship or affiliation, including by way of adoption of guardianship. In the context of the UAE8, kinship includes common blood ties as determined by the ancestors or common ancestors of the individual, where an ancestor or common ancestor may include guardians or adoptive parents, and affiliation covers relationship by marriage, or if one natural person’s spouse is related by kinship to the other Natural Person. 8 Federal Law No. 5 of 1985 on the Issuance of Civil Transactions Law, and its amendments. Corporate Tax Guide | Transfer Pricing | CTGTP1 19