With the introduction of the Federal Corporate Tax (CT) regime effective from 1 June 2023, the United Arab Emirates (UAE) has taken a significant step towards aligning its tax framework with international standard. As part of its efforts to align with the OECD’s Global Minimum Tax (Pillar Two), the UAE issued Cabinet Decision No. 142 of 2024, introducing a Domestic Minimum Top-Up Tax applicable to large multinational enterprises. This article highlights the key factors businesses need to consider when navigating the UAE's corporate tax and transfer pricing (TP) landscape.

1. Corporate Tax Framework in the UAE

The UAE’s Federal Corporate Tax is imposed at a standard rate of 9% on taxable income exceeding AED 375,000. Income below this threshold remains exempt, providing relief to small businesses and startups.

The corporate tax applies to:

• UAE-incorporated entities (including Free Zone entities, subject to conditions)
• Foreign entities with a Permanent Establishment (PE) in the UAE
• Individuals conducting business activities under a commercial licence

Exemptions apply to:

• Qualifying public benefit entities
• Government entities
• Extractive and non-extractive natural resource businesses (subject to Emirate-level taxation)
• Certain investment funds

Small Business Relief is available for entities with revenue below AED 3,000,000, allowing them to file a simplified return.

Free Zone Tax Benefits
Entities operating in Free Zones and undertaking Qualifying Activities may entitle to benefit from a 0% corporate tax rate, provided they:

• Maintain adequate economic substance
• Conduct arm’s length transactions with related entities
• Comply with transfer pricing documentation and disclosure obligations
• Maintain audited financial statement

Failing to meet these conditions may result in disqualification from the 0% tax benefit.

2. Mandatory Elections in First Return

Several important elections must be made in the first corporate tax return, and some are irrevocable if not exercised in the first year. Under Ministerial Decision No. 173 of 2023, companies may opt to use the “realisation basis” for capital gains and losses related to investment properties held at fair value under IAS 40. This election allows depreciation deductions but must be made in the first tax period.

3. Transfer Pricing Overview

Transfer Pricing (TP) regulations in the UAE are aligned with the OECD Guidelines and apply to both domestic and cross-border transactions with:

• Related Parties
• Connected Persons

The objective is to ensure transactions reflect arm’s length pricing, thereby preventing artificial profit shifting.

4. Key Transfer Pricing Requirements

As per Federal Decree-Law No. 47 of 2022, the following TP requirements are mandated:

Arm’s Length Principle

Regardless of thresholds, companies must ensure that transactions with related parties and connected persons are conducted at arm’s length price.

Recognized TP Methods

Businesses may apply any of the OECD’s five primary methods:

• Comparable Uncontrolled Price (CUP)
• Resale Price Method
• Cost Plus Method
• Transactional Net Margin Method (TNMM)
• Profit Split Method
  If none of these are suitable, an alternative method may be used.

Documentation Requirements

• Master File and Local File: Mandatory for MNEs with consolidated revenue exceeding AED 3.15 billion (subject to CbCR thresholds).
• Disclosure Form: Required if aggregate transaction value exceeds AED 40 million, and transaction category value exceeds AED 4 million.
• Payments to connected persons exceeding AED 500,000 are also subject to disclosure.

5. Penalties and Compliance Risks

Non-compliance with corporate tax or TP requirements may lead to:

• Significant financial penalties
• Loss of Free Zone tax benefits
• Increased audit and reassessment risk
• Reputational risk

Businesses are advised to conduct proactive TP risk assessments and maintain adequate documentation to support intercompany pricing arrangements.

6. Practical Steps for Businesses

To ensure compliance and minimize risk, businesses should:

• Identify all related party and connected person transactions
• Benchmark intercompany pricing
• Prepare or update TP documentation and disclosure forms
• Evaluate legal and operational structures for tax impact
• Ensure alignment between TP policy and business model
• Track and comply with all FTA notifications, elections, and filing deadlines

Conclusion

With the introduction of corporate tax and transfer pricing rules in the UAE, tax compliance is no longer optional,it is a strategic imperative. The first tax return is particularly critical, as failure to elect certain benefits or reliefs may render them irreversible.