Article (34) of the Corporate Tax Law provides that transactions and arrangements between Related Parties must satisfy the "arm's length standard" when determining Taxable Income, meaning their results must be consistent with what would have been achieved between independent persons in similar circumstances. To achieve this, the Law sets out five transfer pricing methods that may be used to determine the arm's length result.
The Five Transfer Pricing Methods Set Out in the Law
Under Clause (3) of Article (34), the arm's length result is determined by applying one or more of the following methods:
- The Comparable Uncontrolled Price method.
- The Resale Price method.
- The Cost Plus method.
- The Transactional Net Margin method.
- The Transactional Profit Split method.
A Taxable Person may use a method other than these five if it can demonstrate that none of them can reasonably be applied to its transaction, and that the alternative method produces a result consistent with the arm's length standard.
Factors for Selecting the Most Appropriate Method
The most reliable transfer pricing method must be selected taking into account several factors, including the contractual terms of the transaction, its characteristics, the economic circumstances in which it was carried out, the functions performed, assets used and risks assumed by each party, and the business strategies pursued by the Related Parties concerned.
The Authority's Power to Make Adjustments
If the result of a transaction between Related Parties does not fall within the arm's length range, the Federal Tax Authority must adjust the Taxable Income to achieve the arm's length result that best reflects the facts and circumstances of the transaction, based on information that is or will be made available to the Taxable Person. Where Taxable Income is adjusted in this way, the Authority must make a corresponding adjustment to the Taxable Income of the other Related Party to the transaction, to avoid double taxation of the same profit. A Taxable Person may also apply to the Authority for a corresponding adjustment to its own Taxable Income in the State if a foreign competent authority adjusts a transaction concerning it to satisfy a similar arm's length standard.
Who Is a "Related Party"?
Applying the arm's length principle depends on the concept of a "Related Party," which the Corporate Tax Law defines as any person connected to the Taxable Person under the detailed rules set out in Article (35) of the Law. These rules generally cover direct and indirect ownership and control relationships between persons, whether individuals, companies or entities within the same group, which makes the arm's length principle apply broadly across the various kinds of transactions carried out within interconnected economic groups.
Illustrative Example
If a company related to another sells goods within the State to a sister company outside the State at a price substantially lower than what it would have charged an independent party in similar circumstances, that transaction does not satisfy the arm's length standard. In that case, the Authority may adjust the selling company's Taxable Income to reflect the price that would have applied between unrelated parties, while making a corresponding adjustment for the other Related Party if it is taxable in the State.
Legal References
- Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses — Article (34).
For questions about your specific situation, you can ask the UAE Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.