On May 11, 2023, the United Arab Emirates (UAE) Ministry of Finance (MoF) released Ministerial Decision No. 97 of 2023, outlining the requirements for maintaining Transfer Pricing (TP) documentation under the UAE Corporate Tax (CT) regime. The decision aims to provide clarity and guidelines to taxable persons regarding the preparation and maintenance of Local Files and Master Files in accordance with the UAE CT Law.
Scope of the Decision
According to the Decision, taxable persons must maintain a Local File and a Master File if they meet either of the following conditions during the tax period:
- The taxable person is a Constituent Entity (i.e., mainland or free zone subsidiary, branch, or permanent establishment) of a Multinational Enterprise Group, with annual consolidated group revenues exceeding AED 3.15 billion, as defined under Cabinet Decision No. 44 of 2020.
- The taxable person’s revenues exceed AED 200 million.
Inclusion and Exclusion Criteria for Local File:-
The Decision provides guidance on which transactions with Related Parties and Connected Persons should be included or excluded from the Local File:
|To be included in the Local File:||To be excluded from the Local File:|
● A Non-resident Person
● An Exempt Person
● UAE Resident Persons who have elected to avail of Small Business Relief (Article 21 of the CT Law).
● UAE Resident Persons are subject to a different CT rate. This applies specifically to related party transactions between UAE mainland and free zone entities, where the free zone entity is subject to a 0% CT rate.
● UAE Taxable Persons not mentioned in category A. This exemption applies to certain UAE domestic transactions where both parties are subject to CT at 9%.
● Natural Persons when the parties act as if they were independent of each other, based on an arm’s length basis.
● Juridical Persons, considered Related Parties or Connected Persons as partners in an Unincorporated Partnership, when the parties act as if they were independent of each other.
● permanent establishments of non-UAE entities subject to CT at 9%.
Conditions for Acting Independently
The Decision emphasizes that transactions with Natural/Juridical Persons, considered Related Parties or Connected Persons due to being partners in an Unincorporated Partnership, can be excluded from the Local File if certain conditions are met. The conditions for “acting independently” are as follows:
- The transaction is conducted in the ordinary course of business.
- The parties involved in the transaction are not engaged exclusively or almost exclusively with each other.
- If one party’s activities are subject to detailed instruction or control by the other party, they cannot be considered as acting independently.
Consideration of Relevant Facts and Circumstances
The Decision highlights that the Federal Tax Authority (FTA) will carefully assess all relevant facts and circumstances to determine whether parties are acting independently, as required for exclusion from the Local File.
The publication of this Decision empowers UAE businesses to determine their obligation to maintain Local Files and Master Files, as well as understand which transactions with Related Parties and Connected Persons should be covered in the Local File.
However, it is important to note that this Decision solely focuses on TP documentation maintenance and does not provide guidance on the TP Disclosure Form, which is part of the annual CT return. It is anticipated that transactions and arrangements with Related Parties and Connected Persons will likely be included in the TP Disclosure Form, although specific guidance regarding this is yet to be issued.
It is crucial for UAE businesses to recognize that the arm’s length principle remains applicable, and they must review transactions and arrangements with Related Parties or Connected Persons on a case-by-case basis, taking into account the nature of the transaction and the involved counterparties.
Future Guidelines and Support from Elevate
Further guidelines on TP documentation are expected to be released, which will align the Local File and Master File formats with Chapter V of the OECD’s TP Guidelines. These guidelines will also provide a template for the TP Disclosure Form, streamlining the reporting process for businesses.
To assist businesses in navigating these TP requirements, Elevate offers a team of qualified professionals with extensive expertise in Transfer Pricing and Corporate Tax in UAE. Our professionals possess a deep understanding of both local and regional legal frameworks, enabling them to provide comprehensive support and guidance tailored to your specific needs.
The UAE Ministry of Finance’s publication of Ministerial Decision No. 97 of 2023 establishes clear requirements for maintaining Transfer Pricing documentation under the UAE Corporate Tax regime. By complying with these regulations, businesses can ensure proper TP documentation and reporting, fostering transparency and alignment with international standards.
With Elevate’s assistance, businesses can gain a comprehensive understanding of the Transfer Pricing requirements outlined in the UAE Corporate Tax Law and receive expert guidance in fulfilling their obligations effectively. By staying updated on forthcoming guidelines and diligently reviewing their transactions, businesses can navigate the UAE’s TP landscape with confidence and compliance.