UAE CORPORATE TAX LAW: TRANSFER PRICING DOCUMENTATION AND THE SCOPE OF LOCAL FILE DISCLOSURES

The United Arab Emirates (UAE) introduced Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“UAE Corporate Tax Law”), marking a significant step toward aligning with global tax standards. Among its key provisions are the transfer pricing (TP) rules, which ensure that transactions between related parties and connected persons are conducted at arm’s length that is, consistent with how independent entities would transact in open markets.

One of the most critical aspects of these rules is transfer pricing documentation, including the Local File requirement. Businesses operating in the UAE must now understand not only the scope of these obligations but also how to effectively prepare for compliance.

Transfer Pricing in the UAE: An Overview

The UAE’s transfer pricing rules are consistent with the OECD Transfer Pricing Guidelines and are intended to:

-Prevent profit shifting and base erosion.

-Increase transparency for the Federal Tax Authority (FTA).

-Align the UAE with international best practices, particularly those recommended by the OECD/G20 BEPS Action 13 framework.

These rules apply to UAE-based entities that engage in transactions with related parties (such as group companies, subsidiaries, or shareholders) or connected persons (individuals who exert significant control or influence).

Transfer Pricing Documentation Requirements

The UAE Corporate Tax Law and its implementing regulations mandate businesses to maintain robust TP documentation. There are generally two tiers:

-Master File: A group-wide document containing an overview of the multinational enterprise (MNE), including its global operations, policies, and allocation of income.

-Local File: A jurisdiction-specific report detailing the UAE entity’s related-party transactions, supporting that these are consistent with the arm’s length principle.

In addition, businesses must be able to provide contemporaneous records and justifications to the FTA upon request.

Scope of the Local File Disclosure

The Local File is one of the most significant compliance requirements under the UAE regime. It provides a detailed picture of the taxpayer’s local business activities and related-party dealings. Its scope includes:

Transactional Information

-Nature, terms, and conditions of related-party transactions.

-Pricing methods applied and rationale for choosing them.

-Comparability analysis using internal and/or external benchmarks.

Financial Data

-Segmented financial statements to support the arm’s length analysis.

-Reconciliation of local financial data with consolidated accounts where applicable.

Functional Analysis

-Description of functions performed, assets employed, and risks assumed by the UAE entity in the context of intra-group arrangements.

-Explanation of how these roles justify the transfer pricing outcomes.

Transfer Pricing Methodology

-Documentation of the most appropriate transfer pricing method (e.g., CUP, TNMM, RPM, etc.).

-Evidence of benchmarking studies used to test arm’s length pricing.

Exemptions and Thresholds

Not all UAE businesses are required to file a Local File. Exemptions generally apply where:

-The related-party transactions fall below prescribed materiality thresholds.

-The entities involved are both UAE-resident and taxed at the same rate, thereby posing little to no tax avoidance risk.

That said, businesses above the thresholds or those with cross-border transactions must be prepared to maintain and disclose their Local File when requested by the FTA.

Compliance and Risk Management

Failing to prepare adequate transfer pricing documentation or disclosing incomplete or inaccurate information can expose businesses to significant penalties, reputational risks, and potential disputes with the tax authority. To manage compliance effectively, UAE entities should:

-Conduct a TP risk assessment: Identify related-party transactions and evaluate exposure.

-Prepare documentation proactively: Even if not immediately required, having ready-to-submit Local Files mitigates risk during audits.

-Leverage benchmarking studies: Support pricing decisions with reliable third-party data.

-Monitor regulatory updates: The UAE TP framework is relatively new and may evolve with further FTA guidance.

Conclusion

The UAE Corporate Tax Law has ushered in a new era of tax transparency and compliance. With transfer pricing documentation, particularly the Local File at the center of the framework, businesses must invest in proper systems, data management, and compliance protocols.

For UAE entities that are part of multinational groups or engage heavily in intra-group transactions, proactive transfer pricing documentation is no longer just best practice it is a regulatory necessity. By aligning with OECD standards and ensuring arm’s length compliance, businesses can mitigate tax risks while contributing to the UAE’s reputation as a transparent, business-friendly jurisdiction.