What is the arm's length principle?

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.

Length Principle to consider what price two independent parties would have agreed in similar circumstances, and that this should be based, wherever possible, on direct or indirect evidence of how independent parties would have behaved. It is important to note that the absence of a formal pricing arrangement or legal agreement between the transacting Related Parties or Connected Persons does not mean that there is no such arrangement in place. In instances where a transfer of property takes place or a service is provided without a formal arrangement or without remuneration or at remuneration below Market Value, the Arm’s Length Principle should always be applied to determine whether such a transaction or arrangement would have taken place between independent parties under similar circumstances and at what value. The Arm’s Length Principle treats Related Parties and Connected Persons, such as for example, members of a Group, as if they were operating as separate entities rather than as inseparable parts of a single unified Business. Since the separate entity approach treats these members as if they were independent parties, attention is focused on the nature of the Controlled Transactions and on whether the conditions differ from the conditions that would be observed in Comparable Uncontrolled Transactions. Such a comparison of the Controlled Transaction(s) with Comparable Uncontrolled Transactions is named as a “comparability analysis” and is at the heart of the application of the Arm’s Length Principle (see further in section 5). In other words, the Corporate Tax Law requires Related Parties or Connected Persons to earn their “fair share” of profits based on the Arm’s Length Principle. Thus, after applying the Arm’s Length Principle, each Related Party or Connected Person should record operating profits in line with their respective functions, assets, and risks and contributions to the value chain across the Group. Under the Corporate Tax Law and this Guide, the Arm’s Length Principle needs to be applied with respect to domestic as well as cross-border Controlled Transactions. Example 1: Transactions between Related Parties AB Group is a furniture company group with two subsidiaries: Company A, a sawmill located in the UAE, and Company B, a manufacturing company located in Country B where corporate profits are taxed at 5%. Company B purchases a ton of timber from Company A at a price of AED 15,000. The cost for Company A to produce a ton of timber is AED 15,000. The market price for a ton of timber is AED 20,000. Corporate Tax Guide | Transfer Pricing | CTGTP1 17

Article 61 – Transitional Rules 1. A Taxable Person’s opening balance sheet for Corporate Tax purposes shall be the closing balance sheet prepared for financial reporting purposes under accounting standards applied in the State on the last day of the Financial Year that ends immediately before their first Tax Period commences, subject to any conditions or adjustments that may be prescribed by the Minister. 2. The opening balance sheet referred to in Clause 1 of this Article shall be prepared taking into consideration the arm’s length principle in accordance with Article 34 of this Decree-Law. 3. For the purposes of Clauses 1 and 2 of this Article, and as an exception to the provisions of Article 70 of this Decree-Law, the provisions of Article 50 of this Decree-Law shall apply to transactions or arrangements entered into on or after the date this Decree-Law is published in the Official Gazette. Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 59 4. The Cabinet may, at the suggestion of the Minister, issue a decision prescribing other transitional measures related to the implementation of this Decree-Law and the application of its provisions. Chapter Twenty – Closing provisions