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Applicability of Transfer Pricing Rules to Free Zone Companies
The United Arab Emirates (“UAE”) Corporate Tax (“CT”) regime has conferred the benefit of 0% tax rate to all the free zone persons in the UAE subject to fulfilment of certain conditions. Amongst other conditions stipulated in the CT Law, those conditions related to TP may often be overlooked by the free zone persons.
However, it is important to be cognizant of the fact that TP plays a vital role in conferring the tax holiday benefit for free zone persons, since it has broader tax implications for a free zone person as compared to a non-free zone person. We have provided an overview of the TP requirements and their significance in the context of the “tax holiday” benefit for free zone persons.
An overview of TP related conditions under Article 18 (UAE CT Law) and its requirements
|
Condition |
Reference |
Implication |
|
Compliance with the Arms’ Length Principle (“ALP”) |
Article 34 |
The free zone person must comply with the ALP for: (a)Transactions with related parties; and (b)Arrangements between the free zone parent and its foreign or domestic permanent establishments (PE). |
|
Preparation and maintenance of TP documents |
Article 55 |
(a)Maintenance of documentation to demonstrate the arm’s length nature of the relevant transactions. (b)Preparation of a master file and local file if the standalone revenue of the free zone person exceeds AED 200 million or the consolidated group revenue exceeds AED 3.15 billion. (c)Preparation and filing of TP disclosure form. (d)Documentation of profit attribution between free zone parent and its PE. |
Impact of non-compliance with TP
If a free zone person fails to comply with the ALP or does not meet the TP documentation requirements, it risks losing the tax holiday benefit for the tax period in which it fails to comply with the TP and the subsequent four tax period.
Additionally, the tax authorities shall make appropriate adjustments for the related party transactions to reflect the ALP, and such adjusted value shall be considered in the computation of taxable income.
Qualifying activities having potential TP impact
- Distribution of goods or materials.
- Headquarter services.
- Treasury and financing services to related parties.
Key action points
- Undertake a TP impact assessment alongside free zone tax benefit analysis.
- Identify the risks and gaps and take necessary actions to mitigate the potential tax risks.
- Perform a TP analysis to determine the ALP.
- Prepare supporting documentation such as TP policy, benchmarking study, intercompany agreements, etc.
- Actively monitor TP policies throughout the year to mitigate the risk of non-compliance.
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