DIRECTOR’S FEES AND TRANSFER PRICING REGULATIONS IN THE UAE: WHAT BUSINESSES SHOULD KNOW

The New Tax Landscape in the UAE

With the introduction of a federal Corporate Tax (CT) framework under Federal Decree-Law No. 47 of 2022, effective for financial periods beginning on or after June 1, 2023, the UAE has aligned itself with global tax norms. A headline tax rate of 9% applies to profits exceeding AED 375,000, bringing the need for robust compliance practices, including transfer pricing into sharp focus.

Transfer Pricing Framework in the UAE

The UAE’s transfer pricing regime, overseen by the Federal Tax Authority (FTA), is fully anchored in the OECD Transfer Pricing Guidelines and the BEPS (Base Erosion and Profit Shifting) Action Plan.

Key Requirements:

-Arm’s Length Principle: All related parties and connected-person transactions must reflect prices and terms that unrelated parties would accept under comparable circumstances.

-Applicable Methods: The UAE recognizes the five standard methods, Comparable Uncontrolled Price (CUP), Resale Price, Cost Plus, Transactional Net Margin Method (TNMM), and Transactional Profit Split. Alternate methods can be used if they reliably achieve arm’s length outcomes.

Documentation Obligations:

-Disclosure Form: Required in the CT return for related-party and connected-person transactions.

-Master File & Local File: Required if: UAE taxable person has turnover > AED 200 million or Is part of a multinational group with consolidated revenue > AED 3.15 billion.

-Country-by-Country Reporting (CbCR): Applicable for large MNE groups above the revenue threshold.

-Thresholds for Disclosure: If total related-party transactions exceed AED 40 million; or individual categories exceed AED 4 million; or payments/benefits to a single connected person exceed AED 500,000, additional disclosures and documentation are triggered.

Director’s Fees: In the Spotlight Under Transfer Pricing

Director compensation including salaries, bonuses, and perks is now squarely within transfer pricing scrutiny when the director qualifies as a related or connected person. This includes individuals controlling or owning 50% or more, or directors with significant decision-making authority (including family members in some instances).

To comply:

-Benchmarking Required: Compensation must be justified through benchmarking against independent market data such as salary surveys from Mercer or Willis Towers Watson to ensure it falls within acceptable ranges.

-Documentation: Any director’s remuneration must be properly detailed in the Local File and related Disclosure Forms, especially for businesses exceeding thresholds (e.g., revenue > AED 50 million or MNE status).

-Transactional-Level Analysis: Payments to Key Management Personnel (KMP) must be assessed and benchmarked individually, not just as part of aggregate compensation to adhere to UAE TP guidance.

Typical Compliance Timelines

-Documentation & Disclosure: The Disclosure Form must accompany the Corporate Tax return, and TP documentation must be maintained contemporaneously

-First Filings: For companies with a December 2024 year-end, the first CT return (with TP disclosures) is due by September 30, 2025.

Penalties and Risk Management

Non-compliance through failing to maintain documentation, filing incorrectly, or setting non-arm’s-length compensation can lead to:

-Fines and penalties for TP documentation deficiencies,

-Transfer pricing adjustments leading to increased CT liability, and

-Potential double taxation or disputes with tax authorities

Looking Ahead: Advance Pricing Agreements

The UAE has begun plans for introducing Advance Pricing Agreements (APAs). Under Decision No. 4 of 2024, an APA framework is anticipated, and FTA has confirmed that unilateral APAs will be open for application starting Q4 2025, with other types (e.g., bilateral) to follow later.

Actionable Takeaways for Businesses

-Assess Director Classification: Review of which directors qualify as related or connected persons.

-Conduct Benchmarking: Ensure all directors’ compensation is benchmarked to independent data.

-Prepare TP Documentation: Prepare Disclosure Forms, Local/Master Files, and CbCR as per thresholds.

-Stay Audit-Ready: Be ready for FTA requests TP files must be furnished within 30 days.

-Monitor APA Rollouts: Be prepared to engage with the forthcoming APA program for certainty on complex compensation structures.

In the UAE’s evolving tax regime, director fees are no longer exempt from scrutiny, they are a critical aspect of transfer pricing compliance. With stringent documentation requirements and the looming possibility of APAs, businesses must act proactively. Proper benchmarking, comprehensive documentation, and timely filings are your best defense against FTA audits and potential adjustments.