Effects of Transfer Pricing Rules on the UAE’s Freezone and Mainland Businesses
The UAE’s economic success is not unknown to all. What, in your opinion, would have been the reason behind growing such a strong economy? Not sure? It’s nothing, but due to the existence of a dual zone setup. Now, what is that you might ask? A dual zone setup is a structure where free zone and mainland firms work alongside one another, each having its own distinct rules and systems. However, due to the introduction of corporate tax and transfer pricing, this dual zone structure has become more complicated.
Several companies do not consider this to be a one-size-fits-all situation. A freezone business is challenged by risks very different from those of a mainland business, thereby making transactions between them have a more unique custom approach. Recognizing these sector-specific shortcomings is the key to remaining compliant and avoiding many penalties.
This article gives you a detailed insight into the distinctive transfer pricing problems faced by both freezone and mainland entities in the UAE.
Transfer Pricing Rules for Mainland Businesses in the UAE
When it comes to the transfer pricing rule of business in the UAE mainland, it follows the new corporate tax head on.
The main focal point of this is to ensure that any business done with companies within ot out of the country is conducted under fair market value.
Key Issues:
➠ Domestic Deals: Mainland companies have no choice but to pay attention to deals with related companies in the UAE. For example, just like any transaction with any international subsidiary, a payment with a sister company in Dubai should be done at a fair price.
➠ Paperwork & Burden of proof: The companies operating in the UAE mainland must possess compelling master file and local file records if they exceed revenue limits. This will help prove a fair price.
➠ Global Transactions: When international groups have branches in the mainland UAE, the pricing policies must be compatible with global policies and, at the same time, follow UAE policies, focusing on local comparisons.
The Unique Challenges Faced by Free Zone Companies
Most free zone companies tend to make the wrong assumption that they do not fall under tax pricing rules, which clearly is a wrong assumption, and problems exist, risking their tax benefits.
Key Issues:
➞ 0% tax rate condition: Companies that come under the free zone are not automatically subjected to the 0% corporate tax rate for a qualifying free zone person. In order to be considered eligible, the company must abide by the corporate tax law, including pricing rules. Failure to follow fair value rules can lead to the removal of QFZP status.
➞ Defining “qualifying income:” A qualified income from deals across other free zone companies is what free zone rules depend on. Complications tend to arise when it comes to dealing with non-freezone or mainland companies.
➞ Internal and external deals: Fair value rules are mandatory for free zone companies on all related dealsjust like mainland companies. This includes deals in the mainland, freezone, or abroad, be i, with sister firms, parent firms, or any related firms.
The Issues Behind Transactions Between Freezone and Mainland
For a company working in both zones, this is the most challenging and perilous area. The reason behind this is that the deals between the two are checked closely as they are always viewed as related deals.
Key Issues:
➢ Valuation & proof: Record and explanation must be provided for the sale of royalties, goods, and services on any deal between the companies of both freezone and mainland, showing g fair price.
➢ Risk of profit shifting: Mainland companies must be careful while making payments. Too much payment to a free zone service will be considered tax avoidance since authorities are keeping a close watch for fake profit moves.
➢ Loss of freezone status: A wrong deal with a mainland company can lead to the risk of losing QFZP status for a freezone company, bringing them a 9% tax bill and many other problems.
Driven Practices For Both Zones
We understand that a global pricing policy does not always work. Hence, dealing with two-zone challenges tends to require planning and careful steps.
-Risk check: It is important that all transactions between both zones be spotted and a full review of risk be done regularly.
-Separate policies: Curate a transfer pricing policy for companies in the free zone to show that fair value rules are being followed, keeping QFZP status.
-Strong paperwork: Maintain solid records, briefing the assets, risk, and roles of freezone and mainland companies, mainly the local file, including a study of deals between zones.
-Audit-ready mindset: Make sure records are all set, considering the 30-day limit to submit master and local files is short, so being prepared before deadlines is good.
How Flying Colour Tax Consultant Can Help?
The complexities we see due to transfer pricing span across the UAE’s various economic zones, require professional guidance. We at Flyingcolour Tax Consultant aim to help companies with intricate free zone and mainland structures steer their way through these problems with utmost confidence.
Our services are:
- Complex Dual-Zone Risk Review
- Tailored TP Policy Design
- Seamless Documentation and Compliance
- Strategic Expert Advisory
Don’t allow the complications made by the UAE’s dual-zone tax structure to turn into a hindrance. By teaming up with our professionals, you can grow an amenable and well-organized system that holds your long-term business goals.
To learn more about Transfer Pricing in UAE: Freezone and Mainland Guide, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.