Transfer Pricing & Related Party Transactions Glossary (UAE Corporate Tax Law)

Transfer Pricing

Transfer Pricing refers to the pricing of goods, services, financing, or intangibles exchanged between related parties. Under UAE Corporate Tax Law, such transactions must follow the arm’s length principle to ensure profits are fairly allocated and prevent artificial shifting of income between related entities.

Related Party

A Related Party is an individual or entity with ownership, control, or significant influence over another entity. UAE Corporate Tax Law defines related parties broadly to include shareholders, group companies, directors, and close family members involved in controlled or connected transactions.

Connected Person

A Connected Person includes individuals such as owners, directors, officers, or their relatives who have influence over a business. Payments or benefits provided to connected persons must be at arm’s length to remain deductible under UAE Corporate Tax regulations.

Arm’s Length Principle

The Arm’s Length Principle requires related party transactions to be priced as if they were conducted between independent parties under similar circumstances. This principle is central to UAE transfer pricing rules and ensures fairness, transparency, and compliance with international tax standards.

Controlled Transaction

A Controlled Transaction is a transaction between related parties or connected persons. These transactions are subject to transfer pricing rules and must be supported with documentation proving compliance with the arm’s length principle under UAE Corporate Tax Law.

Uncontrolled Transaction

An Uncontrolled Transaction occurs between independent parties with no relationship or influence. Such transactions are used as comparables to benchmark related party transactions and determine arm’s length pricing.

Transfer Pricing Documentation

Transfer Pricing Documentation includes reports and analyses that demonstrate compliance with arm’s length requirements. UAE Corporate Tax Law requires eligible taxpayers to maintain documentation to justify pricing of related party transactions during audits.

Local File

A Local File contains detailed information on a UAE entity’s related party transactions, functional analysis, and benchmarking studies. It supports compliance with transfer pricing rules and must be available upon request by the Federal Tax Authority.

Master File

A Master File provides a high-level overview of a multinational group’s global operations, transfer pricing policies, and value chain. Large UAE taxpayers that are part of multinational groups may be required to maintain a Master File.

Benchmarking Study

A Benchmarking Study compares related party transactions with comparable uncontrolled transactions to determine arm’s length pricing. It is a critical component of transfer pricing documentation under UAE Corporate Tax Law.

Comparable Uncontrolled Price (CUP) Method

The CUP Method compares prices charged in related party transactions with prices charged between independent parties for similar transactions. It is considered the most direct and reliable transfer pricing method when comparable data is available.

Resale Price Method (RPM)

The Resale Price Method determines arm’s length pricing by subtracting an appropriate gross margin from the resale price to an independent customer. It is commonly used for distributors and resellers in related party transactions.

Cost Plus Method

The Cost Plus Method calculates arm’s length pricing by adding an appropriate markup to the costs incurred by the supplier. It is often used for service providers and manufacturers operating within related party structures.

Transactional Net Margin Method (TNMM)

TNMM examines net profit margins relative to appropriate bases such as costs, sales, or assets. It is widely applied in UAE transfer pricing where transactional comparables are limited.

Profit Split Method

The Profit Split Method allocates combined profits between related parties based on their relative contributions. It is suitable for complex transactions involving integrated operations or valuable intangibles.

Functional Analysis

Functional Analysis evaluates the functions performed, assets used, and risks assumed by each party in a transaction. It forms the foundation of transfer pricing analysis under UAE Corporate Tax Law.

DEMPE Functions

DEMPE stands for Development, Enhancement, Maintenance, Protection, and Exploitation of intangibles. UAE transfer pricing rules emphasize DEMPE analysis to determine which entity is entitled to intangible-related returns.

Intangible Assets

Intangible Assets include intellectual property such as trademarks, patents, software, and know-how. Transactions involving intangibles are closely scrutinized under UAE transfer pricing regulations.

Intragroup Services

Intragroup Services are services provided between related entities, such as management, IT, or administrative support. Charges must reflect actual benefits received and be priced at arm’s length.

Management Fee

A Management Fee is a charge for strategic or administrative services provided by a related entity. Under UAE Corporate Tax Law, such fees must be justifiable, beneficial, and priced at arm’s length to be deductible.

Shareholder Activities

Shareholder Activities are activities performed solely due to ownership interests. Costs related to shareholder activities are generally non-chargeable and non-deductible under transfer pricing rules.

Cost Allocation

Cost Allocation refers to distributing shared costs among related entities. Allocation keys must be reasonable, consistent, and aligned with the benefits received to comply with arm’s length requirements.

Intragroup Financing

Intragroup Financing includes loans, guarantees, and cash pooling arrangements between related parties. These transactions must be priced at arm’s length, including interest rates and terms.

Thin Capitalization

Thin Capitalization occurs when a company is excessively funded by debt rather than equity. UAE Corporate Tax Law limits interest deductions to prevent base erosion through excessive related party debt.

Arm’s Length Interest Rate

An Arm’s Length Interest Rate reflects market conditions, credit risk, and loan terms. Related party loans must apply such rates to comply with UAE transfer pricing regulations.

Financial Guarantees

Financial Guarantees provided by related parties must be priced based on the economic benefit and risk assumed. Guarantee fees must reflect arm’s length compensation.

Business Restructuring

Business Restructuring involves reorganization of functions, assets, or risks within a group. UAE transfer pricing rules require such restructurings to reflect commercial reality and arm’s length compensation.

Risk Allocation

Risk Allocation assigns business risks among related entities. Risks must be aligned with decision-making capacity and financial capability under UAE transfer pricing principles.

Economic Substance

Economic Substance refers to having real operations, people, and decision-making in the UAE. Substance supports transfer pricing positions and prevents challenges during audits.

Commercial Rationality

Commercial Rationality requires transactions to make business sense beyond tax benefits. UAE tax authorities may disregard arrangements lacking genuine commercial purpose.

Value Creation

Value Creation identifies where profits should be taxed based on economic activity. Transfer pricing aligns taxable income with value creation across related entities.

Transfer Pricing Adjustment

A Transfer Pricing Adjustment modifies taxable income to reflect arm’s length pricing. Adjustments may be made by taxpayers or imposed by the Federal Tax Authority.

Corresponding Adjustment

A Corresponding Adjustment prevents double taxation by adjusting profits in another jurisdiction following a primary transfer pricing adjustment.

Primary Adjustment

A Primary Adjustment is an adjustment made by tax authorities to align transaction pricing with arm’s length standards.

Secondary Adjustment

A Secondary Adjustment addresses the tax consequences arising from a primary adjustment, such as deemed dividends or loans.

Documentation Threshold

Documentation Thresholds determine which taxpayers must maintain transfer pricing documentation. UAE rules apply thresholds based on revenue and group size.

Disclosure Form

A Disclosure Form requires reporting of related party transactions in corporate tax returns. It enhances transparency and risk assessment by the FTA.

Tax Audit

A Transfer Pricing Audit examines related party transactions for compliance. Proper documentation reduces audit risk and penalties.

Penalty Exposure

Penalty Exposure arises from non-compliance with transfer pricing rules. Inadequate documentation or mispricing can lead to fines and tax adjustments.

Advance Pricing Agreement (APA)

An APA is an agreement with tax authorities on future transfer pricing methodology. While not yet formalized in UAE, it reflects international best practice.

OECD Transfer Pricing Guidelines

The OECD Guidelines provide global standards for transfer pricing. UAE Corporate Tax Law is aligned with these principles.

BEPS Action Plan

The BEPS Action Plan targets profit shifting and tax avoidance. UAE transfer pricing rules reflect BEPS objectives.

Multinational Enterprise (MNE)

An MNE operates across multiple jurisdictions. UAE entities within MNEs must comply with transfer pricing rules.

Country-by-Country Reporting

CbCR requires large MNEs to report global income and taxes. It enhances transparency and risk assessment.

Substance-Over-Form

Substance-Over-Form prioritizes economic reality over legal structure. UAE tax authorities apply this principle in transfer pricing reviews.

Contractual Terms

Contractual Terms define rights and obligations in related party transactions. They must reflect actual conduct to be respected for tax purposes.

Actual Conduct Test

The Actual Conduct Test compares contracts with real behavior. Inconsistencies may lead to recharacterization of transactions.

Recharacterization

Recharacterization allows tax authorities to disregard artificial arrangements. It applies when transactions lack commercial substance.

Tax Neutrality

Tax Neutrality ensures business decisions are not driven by tax distortions. Transfer pricing supports neutrality.

Profit Attribution

Profit Attribution allocates profits based on functions, assets, and risks. It is central to arm’s length compliance.

Distribution Model

A Distribution Model defines roles of distributors within a group. Pricing must reflect the distributor’s risk profile.

Limited Risk Distributor

A Limited Risk Distributor performs routine functions and earns stable margins. Transfer pricing reflects lower risk.

Full-Fledged Distributor

A Full-Fledged Distributor assumes higher risks and earns higher returns under transfer pricing rules.

Contract Manufacturer

A Contract Manufacturer produces goods for related parties with limited risk. Pricing reflects cost-plus returns.

Toll Manufacturer

A Toll Manufacturer processes goods owned by another entity. It earns a processing fee at arm’s length.

Principal Company

The Principal Company owns key risks and intangibles. It earns residual profits.

Marketing Intangibles

Marketing Intangibles include brand value and customer relationships. DEMPE analysis determines profit entitlement.

Royalty Payments

Royalty Payments compensate use of intangibles. Rates must be arm’s length.

License Agreement

A License Agreement allows use of IP. Terms must reflect economic reality.

Cost Contribution Arrangement

A Cost Contribution Arrangement shares development costs among group entities.

Safe Harbour

Safe Harbour provides simplified compliance. UAE currently follows detailed analysis rather than safe harbours.

Transfer Pricing Policy

A Transfer Pricing Policy sets pricing principles across the group.

Compliance Framework

A Compliance Framework ensures ongoing adherence to rules.

Risk Assessment

Risk Assessment identifies exposure to pricing adjustments.

Audit Trail

An Audit Trail supports transaction pricing decisions.

Internal Comparables

Internal Comparables are transactions within the group with third parties.

External Comparables

External Comparables come from market databases.

Interquartile Range

Interquartile Range filters outliers in benchmarking.

Tested Party

The Tested Party is the least complex entity.

Profit Level Indicator (PLI)

A PLI measures profitability for benchmarking.

Operating Margin

Operating Margin compares operating profit to revenue.

Return on Costs

Return on Costs measures profitability relative to costs.

Asset Intensity

Asset Intensity influences return expectations.

Risk Profile

Risk Profile determines expected profitability.

Economic Analysis

Economic Analysis supports pricing decisions.

Documentation Readiness

Documentation Readiness reduces audit risk.

Tax Governance

Tax Governance ensures accountability.

Compliance Monitoring

Compliance Monitoring tracks obligations.

Tax Certainty

Tax Certainty reduces disputes.

Related Party Disclosure

Related Party Disclosure increases transparency.

Transfer Pricing Review

A Transfer Pricing Review identifies risks.

Tax Optimization

Tax Optimization aligns pricing legally.

Regulatory Alignment

Regulatory Alignment ensures compliance.

Dispute Resolution

Dispute Resolution manages disagreements.

Mutual Agreement Procedure (MAP)

MAP resolves treaty disputes.

Tax Efficiency

Tax Efficiency minimizes lawful exposure.

Compliance Risk Management

Compliance Risk Management mitigates penalties.

Value Chain Analysis

Value Chain Analysis identifies profit drivers.

Strategic Alignment

Strategic Alignment supports long-term compliance.

Transfer Pricing Advisory

Transfer Pricing Advisory provides expert guidance.

Value Chain Analysis

Value Chain Analysis identifies profit drivers.

Strategic Alignment

Strategic Alignment supports long-term compliance.

Audit Defense

Audit Defense supports positions during audits.

Documentation Maintenance

Documentation Maintenance ensures accuracy.

Regulatory Updates

Regulatory Updates reflect law changes.

Tax Technology

Tax Technology automates analysis.

Data Integrity

Data Integrity ensures reliability.

Transfer Pricing Compliance

Transfer Pricing Compliance ensures all related party transactions meet UAE Corporate Tax Law requirements.