The Federal Tax Authority of United Arab Emirates provided a Corporate Tax Guide in 2024 on November 11 for businesses to help them with their annual tax return . The guide explains every step, mostly regarding how to complete the Disclosure Form of Transfer Pricing. It is required to report transactions that involve Related Parties and Connected Persons using this form.
Key Features
All Related Party transactions have to follow the fair market value principle, no matter if they are included in the DF. The amount paid or advantages allocated by a Tax payer to its CP are only allowed as a deduction up to the amount equal to the market value of what was provided.
Thresholds are created for the purposes of disclosure. According to the Related Party Transactions summary, disclosure must happen if the total value of Related Party transactions, as reported in the Financial reports or based on Market Value, surpasses 40 million dirhams. After exceeding this initial threshold, it is necessary to reveal distinct transaction types worth more than 4 million dirhams.
You have to complete the Connected Person schedule if the total amount of transactions with any CP (and their RPTs) is above 500,000 Dirhams. In addition, any amount that is paid or advantage that is greater than this amount should also be revealed.
If transactions are not at fair market value, a Transfer pricing correction is required and must be reported manually. All these extra deductions should be disclosed by taxpayers, regardless of whether they are listed within the Related Party and Connected Person schedules.
Qualified Free Zone people must check that all RPTs adhere to Arm’s Length Principle and keep proper documentation under Transfer Pricing requirements. Also, any cost that cannot be deducted under the Interest deduction limit rule must be reported.
Schedule of Transactions for Related Party
You should organize all your transactions into interest, services, assets, goods etc. Both earnings and expenditures should be separated and given in terms of their actual and estimated values. Fair pricing will make sure that the two amounts are equal.
You can choose among the five accepted tax methods or go with a suitable alternative method. When there is a difference between the arm’s length value and the actual transaction value, modifications can be done in the DF. Higher increases in income subject to corporate tax should not be balanced out by smaller decreases in taxable income.
The application to the FTA is needed in order to decrease taxable income by using downward adjustments. If the downward adjustment is not accepted, then enter zero for the amount. Related parties do not have to disclose their dividends.
Effect on taxpayers
All TP adjustments must be completed before finalizing the Financial Statements to reduce possible effects of adjustments during the preparation of DF. Even if transactions fall below the 40 million dirhams aggregate or 4 million dirhams individual transaction (per category) criteria, taxpayers are still required to make sure that all RPT corrections are valued at arm’s length.
Generally, the FTA wants all taxpayers to take the initiative in carrying out proper checks, balances, and tough internal measures that show compliance with the arm’s length principle for every controlled transaction. It is necessary since Financial Statements’ records may not always include some RPTs and payments/benefits to CPs correctly.
It should be mentioned that assets and liabilities are part of the transaction category in the schedule. Before deciding that the threshold (40 MILLION dirhams) is met, the transactions involving balance sheet items should be taken into account. Giving a loan to a related party may be labeled as an asset deal for the lender and a corresponding liability for the borrower, and it should be involved in the DF. The repayments of the principal on the same loan will have a similar impact and will also be shown in the RP.
The guidance in the TRG does not state which kinds of related party transactions between tax group members need to be included in their schedules. Because of this, it is unclear how such transactions need to be revealed in DF according to the regulations of Ministerial Decision No. 125 of 2023 on Tax Group.
Schedule of Connected Person
To adhere to ALP rules, all CPs and related parties must be given disclosures of payments or benefits if the total payment or benefit value exceeds 500,000 dirhams. You should make separate disclosures for each payment or benefit given to the same CP. Any service or benefit provided by the CP must be valued at market rates and reported by the company, and any changes (i.e., the discrepancy between transaction value and market value) are calculated automatically and not allowed for CT.
Effect on taxpayers
All CPs and related parties must be mapped by taxpayers by listing all payments or benefits given to each CP (and their related parties) to make sure that disclosure in the CP schedule is correct whenever the 500,000 dirhams threshold is exceeded.
If the payments and benefits given to CPs are not at the market value, then all these payments or benefits should be disclosed, even if transactions do not meet the 500,000 dirhams threshold.
Profit or loss that is achieved during the current Tax Period in relation to assets or liabilities previously taken from a Related Party at a non-arm’s length price
Taxpayers should determine the gains or losses related to the transfer of previous assets or liabilities from Related Parties, following Article 3 of Ministerial Decision No. 134 and specific sections of the Corporate Tax Guide on Accounting Standards and Interaction with Corporate Tax. Various events that may trigger realization include sale, the asset being transferred, settlement, loss of value in an asset, or debt being forgiven.
Effect on taxpayers
People or businesses paying taxes are responsible for checking if the realization of assets or liabilities they received at non-arm’s length prices from Related Parties follows Article 3, Ministerial Decision No. 134 of 2023. Whenever assets or liabilities are acquired at a cost that differs from arm’s length, the related gain or loss should be recorded properly.
Schedule of Free Zone
It is a requirement for Qualifying Free Zone Persons (QFZP) to confirm compliance with the ALP for their RPTs and to make sure their TP documents adhere to Article 55 of the UAE CT Law.
Effect on taxpayers
It is necessary for Qualifying Free Zone Persons to carry out a complete assessment of the TP and maintain proper records to prove compliance with RPT requirements.
Conclusion
Firms under the FTA’s self-review system for Transfer Pricing (TP) are responsible for correctly reporting all active transactions with Related and Connected Parties and for reporting any required changes.
Even though the thresholds for RPTs are higher, the lower threshold for Connected Persons should be mentioned in business disclosures. It is necessary to do extra manual reporting for transactions that fall outside arm’s length.
All taxpayers are required to ensure correct reporting, check that their RPTs match arm’s length guidelines, link CP payments with market value, and have proper documents. Being aware and prepared is important to meet the TP rules and avoid risks.
