As UAE businesses navigate their first full year of CT compliance, intercompany financing has emerged as one of the most scrutinized areas under the Federal Tax Authority’s (“FTA”) lens.

The concern arises because intercompany financing arrangements (e.g., loans and cash pools) have a material impact on the tax base. These transactions are often executed without adequate pricing mechanisms, defined terms, or contemporaneous documentation, failing the arm's length standard.

1. Understanding Why Intragroup Financing Demands Attention

Historically, intragroup funding was viewed as an internal treasury matter. The UAE’s tax-free environment meant little incentive to benchmark intercompany interest rates or maintain loan agreements.

Now, under the CT regime, interest income and expense directly affect taxable profits, making it essential to prove that the underlying pricing, tenor, and risk profile are consistent with what independent parties would agree in comparable circumstances, whether in the form of loans, advances, guarantees, or cash management.

2. The Key TP Challenges in Intragroup Financing Transactions

Absence of formal agreements

Many groups operate with verbal or informal funding arrangements. Without written loan agreements specifying interest rate, tenure, repayment, and security, it becomes difficult to establish arm’s length terms. The FTA is likely to question such transactions unless they are formalized and contemporaneously documented.

Determining credit ratings

Pricing a loan starts with assessing the borrower’s creditworthiness. However, most UAE entities are unrated. Hence, the technical question is whether the credit rating should reflect the standalone risk of the entity or incorporate the value of group support.

The OECD recommends a stand-alone credit assessment adjusted for group support notches. In practice, a hybrid approach with standalone rating with a one-notch uplift for implicit parental support often provides a defensible basis.

Selecting the right benchmark

Many practitioners’ default to using a group’s internal cost of funds or a LIBOR-plus spread. Yet, the FTA expects objective, external benchmarks, such as market bond yields or loan data for similar credit profiles, maturities, and currencies.

The challenge is further compounded by the shift from LIBOR to SOFR, EURIBOR, and EIBOR, each carrying different term structures. Selecting and documenting the right base rate and ensuring consistent application across the group is critical.

Thin capitalization and excessive debt

Although the UAE CT Law does not impose a fixed debt-to-equity ratio, interest deduction limitations under Article 30 (30 % of EBITDA cap) effectively act as a thin-cap rule. Groups with highly leveraged entities may face both TP and interest deductibility challenges especially if debt levels lack commercial rationale.

Interest-free or below-market Loans

Many UAE groups continue to provide interest-free loans to subsidiaries, citing “cash support” or “temporary funding.” However, under the ALP, even implicit financial support constitutes a service that must be priced. Unless clearly documented as equity, interest-free loans can trigger notional income adjustments in the lender’s books or disallowance of interest deduction in the borrower’s accounts.

Intragroup guarantees and cash pools

Guarantee fees, letters of comfort, and centralized treasury models present further complexity. Determining whether a guarantee provides measurable economic benefit and at what fee is highly subjective. Similarly, cash pooling requires allocating benefits between depositors and borrowers, considering liquidity risk and opportunity cost.

3. The FTA’s likely focus areas

The FTA has not yet issued specific TP rulings on financing, but early compliance reviews suggest an emphasis on substance and documentation. Likely areas of review include:

• Consistency between the TP Disclosure Form, Local File, and loan agreements.
• Evidence of benefit test for interest-free or back-to-back arrangements.
• Credit analysis methodology used for benchmarking.
• Currency alignment (AED vs USD vs EUR loans) and base rate consistency.
• Treatment of extended credit terms — e.g., if trade receivables are outstanding far beyond normal credit periods, the FTA may view them as de-facto loans subject to interest.

4. Practical steps for UAE businesses

To mitigate TP risks, taxpayers should proactively review their intercompany financing landscape and take the following steps:

1. Identify all financing transactions – including implicit loans (e.g., long-outstanding receivables, cash advances).
2. Prepare or update intercompany loan agreements – define principal amount, tenure, repayment terms, interest rate, and default clauses.
3. Undertake credit rating analysis – use external models or simplified scoring frameworks (e.g., Moody’s risk matrices or synthetic ratings).
4. Benchmark interest rates – using databases such as Refinitiv or LoanConnector; ensure currency and tenor comparability.
5. Assess group cash management – identify if any implicit guarantee or pooling benefit exists and whether it requires pricing.
6. Maintain contemporaneous TP documentation – include benchmarking rationale, comparability criteria, and explanations for any deviations.

5. Conclusion

While the UAE TP regime permits related-party financing, it strictly mandates commercial justification and arm's length pricing. As the FTA escalates TP audits, these financing transactions are anticipated to be a primary focus of inquiry.

Taxpayers must therefore manage intragroup loans exactly as they would third-party arrangements: fully documented, properly priced, robustly benchmarked, and supported by a clear financial rationale.

The ultimate objective is to establish a framework that successfully balances tax defensibility with practical business needs, ensuring compliance without restricting group liquidity.