Transfer prices between affiliated companies are also subject to special tax regulations in Dubai. The proximity of the parties involved and the comparability of the calculated values compared to transactions on the open market play an important role. However, this also requires a look into detail. In addition, transfer prices between related entities are relevant at both national and international level.

1st Transfer Pricing in Dubai – Introduction

When one company charges a service to another, it is assumed that this corresponds to a market equivalent. But if a company in a low-tax state overcharges another company in a higher-tax country, and both companies directly or indirectly belong to the same person, then that person gains a tax advantage – an unfair one. Because the expense in the high-tax state, on the one hand, reduces the profit of the company there, so that there is a lower tax. On the other hand, the excess income in the other company only leads to a comparatively low tax. This financial advantage then also requires an economic advantage over the competition.

This tax design used to be a common method. With it, international companies could legally transfer their profits to such low-tax countries. The prices for the services that such affiliated companies of a multinational group agree among themselves are called international transfer prices. They are therefore an important aspect in the taxation of income generated in a cross-border context. And this is practically globally relevant.

But here we want to bring you closer to the view of the United Arab Emirates (UAE) on these connections. In addition to the international application framework, there is also a need for domestic rules on transfer pricing, in particular due to the special tax regimes applicable to the many free trade zones located in the Emirate of Dubai. Transfer pricing can also be relevant at national level.

2. Who is a close person in Dubai?

In order to understand the tax regulations around transfer prices in Dubai in their entirety, one has to take note of a number of different definitions by the local legislature. Of particular importance is the definition of who is considered a related party within the meaning of the tax law there.

In fact, in the UAE one distinguishes between several cases. First of all, close persons are to be understood as all natural persons who are related to each other up to the fourth degree. Natural persons may also be classified as close partners if they are partners of a partnership or otherwise partners in economic terms. In addition, a related relationship is to be assumed if one person can influence another to a significant extent. What exactly is meant by influence in this regard, however, is currently inadequately worked out. This certainly includes the possibility of binding instructions.

Natural persons can also be related to legal persons. This applies in Dubai and elsewhere when it comes to shareholders of a corporation. If a shareholder holds at least 50 % of the company’s capital, this relationship must be qualified as a related party. The same applies in the UAE, however, if there is a claim over 50% or more on the dividend. However, the control of a corporation is also relevant as a criterion. Among other things, this is given if you can decide on the appointment of the managing directors.

Arm’s length or the arm’s length principle

Another very important aspect when considering transfer pricing in Dubai and elsewhere in the UAE is the level of mutually charged expenses. The legislator is guided by the internationally recognized OECD guidelines. This includes in particular the fact that transfer prices may only be as high as they would be agreed with third parties under normal market conditions. In principle, transfer pricing in Dubai should not differentiate between affiliated companies or related persons and foreign parties. For example, the methods for determining transfer prices in Dubai are to be examined according to five criteria: