Transfer Pricing

For Indian companies in the UAE, Related Parties means entities or individuals that have a relationship with your company. This concept is crucial under UAE tax law to prevent tax evasion and ensure fair transactions, integrity of the tax system. The definition generally includes entities and individuals with a close connection. Common examples of related parties include:

• Controlled Entities: A parent company and its subsidiaries are typically related parties. For example, your company in India and its subsidiary in the UAE would be related parties, control is determined by the ownership of a significant percentage of voting shares.* Key Management: Individuals who have the authority and responsibility to plan, direct and control the activities of an entity, such as executive officers and directors, are often related parties.

• Close Family Members: Transactions with your company and close family members of its key individuals may be reviewed to ensure they are at arm’s length, meaning the terms are comparable to those between unrelated parties.

• Entities under Common Control: Entities controlled by the same party or parties are often related. This can include situations where different entities in the UAE and India are controlled by the same individual or group.

• Entities with Significant Influence: Entities that have significant influence over each other, even if there is no formal control, may be treated as related parties.

• Entities with Significant Influence: Entities that have a significant influence over each other, even if there is no formal control, may be treated as related parties.

In the context of related party transactions, the UAE tax authorities are concerned that these transactions are at arm’s length—i.e. under terms and conditions that would apply between unrelated parties. This is to prevent manipulation of prices for tax avoidance. UAE tax laws require companies to disclose all related party transactions in their financial statements and tax returns.

“Substance over form” is a fundamental principle in UAE Transfer Pricing (TP) and Corporate Tax (CT) that Indian companies must understand. It means that the economic reality of a transaction or arrangement should prevail over its legal or formal structure when determining its tax treatment. This principle is important in related party transactions, such as between your UAE entity and its head office in India.

The arm’s length principle is a key aspect of transfer pricing in the UAE, which means that transactions between your related parties should be priced as if the parties were independent and unrelated. This principle ensures all transactions reflect true market conditions and economic substance.

The Organization for Economic Co-operation and Development (OECD) provides detailed guidelines on transfer pricing, including substance over form. For Indian multinationals, please note that these guidelines are widely adopted by many countries, including the UAE and India, in their transfer pricing regulations.

For Indian multinationals, the Master File and Local File are part of the Transfer Pricing (TP) documentation framework developed by the Organisation for Economic Co-operation and Development (OECD) and adopted in the UAE. These files are part of the three-tiered approach to transfer pricing documentation, which also includes Country-by-Country Reporting (CbCR).

The Master File is a comprehensive document that provides an overview of your multinational group’s global business operations, policies and intra-group transactions. It is meant to give tax authorities an insight into the overall business structure. The Local File is a more detailed document specific to the UAE jurisdiction. It must provide detailed information on the specific transactions undertaken by your local UAE entity and the application of transfer pricing methods to those transactions.

Intra-group transactions are those that occur between entities within the same corporate group, for example, between your Indian parent company and its UAE subsidiary. These transactions can include a wide range of activities, such as sale of goods or services, provision of management or administrative services, licensing of intellectual property (such as trademarks or patents), sharing of research and development activities and financial transactions like loans or guarantees.