As previously reported, the UAE Federal Tax Authority (FTA) has published Federal Decree-Law No. 47 of 2022 on Taxation of Corporations and Businesses. The Decree-Law provides for the introduction of the UAE's new Corporate Tax regime, which will take effect for tax periods beginning on or after 1 June 2023. The main details of the Corporate Tax regime in regard to transfer pricing and anti-avoidance are as follows:

Arm's Length Principle

In determining taxable income, transactions and arrangements between related parties must meet the arm's length standard and any conditions that may be prescribed in a decision issued by the FTA. A transaction or arrangement between related parties meets the arm's length standard if the results of the transaction or arrangement are consistent with the results that would have been realized if persons who were not related parties had engaged in a similar transaction or arrangement under similar circumstances. The arm's length result of a transaction or arrangement between related parties must be determined by applying one or a combination of the following transfer pricing methods:

• The comparable uncontrolled price method;
• The resale price method;
• The cost-plus method;
• The transactional net margin method; and
• The transactional profit split method.

A taxable person may also apply any transfer pricing method other than the listed methods where the taxable person can demonstrate that none of the listed methods can be reasonably applied to determine an arm's length result and that any such other transfer pricing method used satisfies the arm's length condition.

The choice and application of a transfer pricing method or combination of transfer pricing methods must be made having regard to the most reliable transfer pricing method and taking into account the following factors:

• The contractual terms of the transaction or arrangement;
• The characteristics of the transaction or arrangement;
• The economic circumstances in which the transaction or arrangement is conducted;
• The functions performed, assets employed, and risks assumed by the related parties entering into the transaction or arrangement; and
• The business strategies employed by the related parties entering into the transaction or arrangement.

The FTA's examination as to whether income and expenditures resulting from the taxable person's relevant transactions or arrangements meet the arm's length standard shall be based on the transfer pricing method used by the taxable person, provided such transfer pricing method is appropriate having regard to the abovementioned factors.

Application of the selected transfer pricing method or combination of transfer pricing methods may result in an arm's length range of financial results or indicators acceptable for establishing the arm's length result of a transaction or arrangement between related parties, subject to any conditions specified in a decision issued by the FTA. Where the result of the transaction or arrangement between related parties does not fall within the arm's length range, the FTA shall adjust the taxable income to achieve the arm's length result that best reflects the facts and circumstances of the transaction or arrangement.

Where the FTA makes an adjustment to the taxable income, the FTA shall rely on information that can or will be made available to the taxable person. Where the FTA or a taxable person adjusts the taxable income for a transaction or arrangement to meet the arm's length standard, the FTA shall make a corresponding adjustment to the taxable income of the related party that is a party to the relevant transaction or arrangement. Where a foreign competent authority makes an adjustment to a transaction or arrangement involving a taxable person to meet the arm's length standard, such taxable person can apply to the FTA to make a corresponding adjustment to its taxable income.

Related Parties and Control

"Related Parties" means any of the following:

• Two or more natural persons who are related within the fourth degree of kinship or affiliation, including by way of adoption or guardianship;
• A natural person and a juridical person where:
  • the natural person or one or more related parties of the natural person are shareholders in the juridical person, and the natural person, alone or together with its related parties, directly or indirectly owns a 50% or greater ownership interest in the juridical person; or
  • the natural person, alone or together with its related parties, directly or indirectly controls the juridical person;
• Two or more juridical persons where:
  • one juridical person, alone or together with its related parties, directly or indirectly owns a 50% or greater ownership interest in the other juridical person;
  • one juridical person, alone or together with its related parties, directly or indirectly controls the other juridical person; or
  • any person, alone or together with its related parties, directly or indirectly owns a 50% or greater ownership interest in or controls such two or more juridical persons;
• A person and its permanent establishment or foreign permanent establishment;
• Two or more persons that are partners in the same unincorporated partnership; and
• A person who is the trustee, founder, settlor or beneficiary of a trust or foundation, and its related parties.

For this purpose, "control" means the ability of a person, whether in their own right or by agreement or otherwise to influence another person, including:

• The ability to exercise 50% or more of the voting rights of another person;
• The ability to determine the composition of 50% or more of the board of directors of another person;
• The ability to receive 50% or more of the profits of another person; or
• The ability to determine, or exercise significant influence over, the conduct of the business and affairs of another person.

Payments to Connected Persons

Without prejudice to the general deductible expenditure rules, a payment or benefit provided by a taxable person to its connected person shall be deductible only if and to the extent that the payment or benefit corresponds with the market value of the service, benefit, or otherwise provided by the connected person and is incurred wholly and exclusively for the purposes of the taxable person's business. For this purpose, a person shall be considered a connected person of a taxable person if that person is:

• An owner of the taxable person;
• A director or officer of the taxable person; or
• A related party of any of the persons referred to above.

To determine that a payment or benefit provided by the taxable person corresponds with the market value of the service or otherwise provided by the connected person in exchange, the relevant arm's length principle provisions shall apply as the context requires.

The deduction limitation for payments to connected persons shall not apply, however, to any of the following:

• A taxable person whose shares are traded on a recognized stock exchange;
• A taxable person that is subject to the regulatory oversight of a competent authority in the UAE; and
• Any other person as may be determined in a decision issued by the Cabinet.

Transfer Pricing Documentation

The FTA may, by notice or through a decision issued by the FTA, require a taxable person to file together with their tax return a disclosure containing information regarding the taxable person's transactions and arrangements with its related parties and connected persons in the form prescribed by the FTA. It is also provided that if a taxable person's transactions with its related parties and connected persons for a tax period meet the conditions prescribed by the Minister, the taxable person must maintain both a Master File and a Local File in the form prescribed by the FTA. The Master File and Local File must be submitted to the FTA within 30 days following a request by the FTA, or by any such other later date as directed by the FTA. A taxable person must also provide the FTA with any information to support the arm's length nature of the taxable person's transactions or arrangements with its related parties and connected persons, within 30 days following a request by the FTA, or by any such other later date as directed by the FTA.

Clarifications / APAs

A person may apply to the FTA for clarification regarding the application of the Decree-Law or for the conclusion of an advance pricing agreement with respect to a transaction or an arrangement proposed or entered into by the person. The application shall be made in the form and manner prescribed by the FTA.

General Anti-Abuse Rule

A General Anti-Abuse Rule (GAAR) applies to a transaction or an arrangement if, having regard to all relevant circumstances, it can be reasonably concluded that:

• The entering into or carrying out of the transaction or arrangement, or any part of it, is not for a valid commercial or other non-fiscal reason which reflects economic reality; and
• The main purpose or one of the main purposes of the transaction or arrangement, or any part of it, is to obtain a Corporate Tax advantage that is not consistent with the intention or purpose of the Decree-Law.

For this purpose, a Corporate Tax advantage includes, but is not limited to the following:

• A refund or an increased refund of Corporate Tax;
• Avoidance or reduction of Corporate Tax payable;
• Deferral of a payment of Corporate Tax or advancement of a refund of Corporate Tax; or
• Avoidance of an obligation to deduct or account for Corporate Tax.

Where the GAAR provisions apply to a transaction or arrangement, the FTA may make a determination that one or more specified Corporate Tax advantages obtained as a result of the transaction or arrangement are to be counteracted or adjusted. If such a determination is made, the FTA must issue an assessment giving effect to the determination, which may include:

• Allowing or disallowing any exemption, deduction, or relief in calculating the taxable income or the Corporate Tax payable, or any part thereof;
• Allocating any such exemption, deduction, or relief, or any part thereof, to any other persons;
• Recharacterizing for Corporate Tax purposes the nature of any payment or other amount, or any part thereof; or
• Disregarding the effect that would otherwise result from the application of other provisions of the Decree-Law.

Further, the FTA can make compensating adjustments to the Corporate Tax liability of any other person affected by the determination made by the FTA.

For the purpose of determining whether the GAAR applies to a transaction or arrangement, the following must be considered:

• The manner in which the transaction or arrangement was entered into or carried out;
• The form and substance of the transaction or arrangement;
• The timing of the transaction or arrangement;
• The result of the transaction or arrangement in relation to the application of the Decree-Law;
• Any change in the financial position of the taxable person that has resulted, will result, or may reasonably be expected to result, from the transaction or arrangement;
• Any change in the financial position of another person that has resulted, will result, or may reasonably be expected to result, from the transaction or arrangement;
• Whether the transaction or arrangement has created rights or obligations which would not normally be created between persons dealing with each other at arm's length in respect of the relevant transaction or arrangement; and
• Any other relevant information and circumstances.

In any proceeding concerning the application of the GAAR, the FTA must demonstrate that the determination made is just and reasonable.

Click the following links for previous articles providing details of the Corporate Tax regime in regard to the tax rate, taxable persons, and the tax base, the determination of taxable income, and the treatment of tax losses and foreign tax credits. Further details on the new Corporate Tax regime will be published in future articles, including in relation to tax administration.