Introduction

Corporate Tax (CT) implementation in UAE was announced on 31st January 2022 by the Ministry of Finance and it was confirmed that one of the mechanisms substantiating the new tax law would be the introduction of Transfer Pricing (TP), based on the Organisation for Economic Co-operation and Development (OECD) principles.

The transactions and entities that would come under the scope of transfer pricing are to be announced in due course along with the reporting and compliance requirements.

What is transfer pricing (TP)?

TP is an intra-company market mechanism used for accounting and taxation purposes and allows for internal pricing transactions within businesses and between subsidiary companies operating under common ownership and control. The TP practice involves both domestic and cross-border transactions. For taxation purposes, the transfer price is essentially at an ‘open market’ or ‘arm’s length value for preventing tax evasion.

What is the role of OECD in transfer pricing (TP)?

OECD has been striving for the prevention of tax avoidance through its ‘Base Erosion and Profit Shifting’ (‘BEPS’) action plan for several years by establishing measures to prevent multinational businesses from evading tax by artificially shifting profits to different low or no-tax jurisdictions.

The UAE, in line with most of the developed countries, has stood by the BEPS program and the adoption of the OECD rules for TP has been a logical move as part of the introduction of CT.

What is OECD’s guidance on transfer pricing?

The essence of OECD transfer pricing guidance revolves around the ‘arm’s length principle that represents an international consensus on the valuation of cross-border transactions between associated enterprises as per OECD. Under prevailing market conditions, a value is stated to be equivalent to arm’s length if it is the same as the price that would be paid between two unrelated entities without any influence over each other.

Detailed guidance is provided by OECD on measures to test, analyze and compare the transfer price for establishing the arm’s length valuation. The prescribed formats for documentation purposes are also provided by the OECD and include Master file, Local file and Country by Country Report (CbCR).

Valuation of TP can be quite complex and needs sufficient data that influences the price to be gathered from both external and internal sources. There are five methods advocated by OECD to determine the arm’s length price.

Which UAE business will be affected?

Theoretically, all businesses will be within the scope of the transfer pricing rules however, in practice, the major effects of the TP regime will be felt by the multinational companies that are involved in transferring goods or services between group establishments. These businesses, in all likelihood, will be required to maintain the records stipulated by the OECD including the preparation of additional annual reports demanded by the FTA.

One-time transactions e.g. sale of high-value assets may also come under the TP rules and may need to be critically reviewed for evaluating TP implications even if the businesses generally don’t undertake intra-group transactions that come under the TP rules.

Family businesses in the UAE providing financial support to each other may be under greater scrutiny and may need to review their TP policies and adapt some of their practices to comply with the TP regulations.

Free zone businesses may need to take into account certain TP considerations and may need to make some additional assessments accordingly. The applicability of the arm’s length principle to such free zone businesses would need to be analyzed once the detailed TP rules are available to satisfactorily address situations where the Free Zones based companies carry out business with mainland UAE entities.

How should UAE businesses get prepared for the transfer pricing (TP) regime?

It is believed that most of the businesses in the UAE have already carried out a high-level impact assessment of the forthcoming TP regime and identified transactions to be affected by it.

Once the detailed TP requirements are issued by the FTA, businesses must undertake an optimization exercise to align existing TP policies with the OECD guidelines followed by implementation of the revised TP policies, as appropriate, by amending policy documents and contracts.

Upon successful implementation, businesses must focus on the compliance aspect and prepare the TP Master file/ Local files/ returns, wherever applicable.

THE TAKEAWAY

The proposed UAE CT regime has kept a provision for TP for ensuring that the price of a transaction is not influenced by the relationship factor between the parties involved.

The millionaire community across the globe are increasingly recognizing Dubai as the most preferred place to relocate as the city strives to elevate its status to a global destination for real estate investment.

On July 19 2022, Sheikh Mohammed bin Rashid Al-Maktoum, the Vice President of the UAE and the Ruler of Dubai introduced a new law to promote the growth of real estate investment funds in Dubai and granted certain privileges to these funds under this new law. The privileges set out in this new law will act as incentives for attracting more funds into the emirate, Dubai Media Office revealed.

A real estate fund is one type of mutual fund that mainly invests in securities floated by public real estate companies. A real estate investment trust, however, invests directly in income-generating real estate and is traded like a stock.

All real estate investment funds licensed and regulated in the Emirate of Dubai by government authorities, private development zones and free zones, including Dubai International Financial Center (DIFC) come under this new law. Properties which are located within the premises of the DIFC are excluded from this law.

The new law makes a provision for the establishment of a register, called the Real Estate Investment Funds Register, for registering the details of all qualifying property funds that are to benefit from the privileges outlined in the new decree-law. Dubai Land Department will be the custodian of this investment funds register.

Real estate funds to be eligible for inclusion in the Register, must own not less than AED 180 million (USD 49 million) of real estate assets and should not be suspended from trading in the Dubai Financial market at the time of submission of the application to register. Payment of a fee of AED 10,000 to the Dubai Land Department must be made during the application for such registration. The regulators including Securities and Commodities Authority, and Dubai Financial Services Authority must also issue licenses for these funds.

The property funds registered in the register will be authorized to acquire properties which are located in the designated areas for foreign ownership in the Emirate of Dubai.

The new law mandates the establishment of a Committee for Property Investment Funds which will be responsible for identifying areas and properties that funds are permitted to invest in. The committee grants full ownership and usufruct rights to the registered property funds. These funds may also opt for long-term lease rights, up to 99 years in certain non-designated areas specified by the committee formed under this new law.

Registered property funds will be levied a land transfer fee of 2% based on the market value of the property payable equally by both the buyer and the seller.

As per the new law, the Governor of the DIFC can roll out other privileges in favour of property funds operating within the boundaries of the financial centre.

The founders of a property fund are permitted to make property contributions in-kind if a fee of AED 50,000 is made while transferring ownership from the founders to the property fund.

Dubai Land Department will engage a valuator recognized by the Real Estate Regulatory Agency during property valuation who shall carry out such a valuation as per the guidelines specified by the land department.

The new law came into force on 22 July 2022, the date it was published in the official gazette.

On 22nd June 2022, The Rt Hon Anne-Marie Trevelyan, Secretary of State for International Trade of the United Kingdom and H.E. Dr Nayef Falah M. Al-Hajraf, Secretary-General of the Gulf Cooperation Council (GCC) officially announced the launch of the UK-GCC FTA negotiations. The UAE, Bahrain, Kuwait, Oman, Qatar and Saudi Arabia are the six middle eastern nations representing the GCC bloc.

The GCC bloc qualifies as the seventh-largest export market for the UK and the demand for global products and services in these six countries is likely to grow by almost 35% to £800 billion by 2035, a 35% resulting in creating massive business opportunities for the UK companies.

Once the FTA deal is through, the GCC nations would invest more in the UK supporting its economy and generating employment in the country.

UK Trade Secretary Anne-Marie Trevelyan said, “Today marks the next significant milestone in our 5-star year of trade as we step up the UK’s close relationship with the Gulf.”

She also highlighted, “Our current trading relationship was worth £33.1 billion in the last year alone. From our fantastic British food and drink to our outstanding financial services, I’m excited to open up new markets for UK businesses large and small, and supporting the more than ten thousand SMEs already exporting to the region.”

The UK Trade Secretary emphasized, “With almost £30 billion already invested in each other’s economies, this deal would also help unlock even more opportunities for investment between the UK and GCC countries.”

The Director of an exporting house based in Liverpool, UK commented, “A strong trading relationship would allow the UK to play to our strengths as a manufacturing powerhouse and a world leader in technology, cyber, life sciences, creative industries, education, AI, financial services, and renewable energy.”

He further emphasized, “UK businesses in these industries will also play a role in supporting GCC countries as they diversify their economies to move away from a reliance on oil and towards other sectors. The UAE, for example, has set a target of generating 50% of its electricity from renewable sources by 2050. Exports of UK wind turbine parts currently face tariffs of up to 15%.”

Dan McGrail, the CEO of Renewable UK said, “The global transition to clean energy includes countries throughout the Middle East which are seeking to make the most of their excellent renewable resources such as solar and wind.”

He added, “As a global leader in wind, marine energy and green hydrogen, we’re perfectly placed to help other countries to accelerate their efforts to decarbonise their energy systems – and to boost our own economy by exporting around the world.”

UK firms have at least £13.4 billion invested in GCC economies and GCC firms have £15.7 billion invested in the UK as of 2020.

The UAE amongst the GCC bloc has always been a frontrunner in building trade and investment relationships with the UK whose government is also seeking to strike a Comprehensive Economic Partnership Agreement (CEPA) with the UAE besides negotiating an FTA deal with the GCC. As the CEPA deal has a much wider scope compared to FTA, once struck can attract more UK companies for doing business in UAE.

Bradley Jones described the UAE-UK Sovereign Investment Partnership (UAE-UK SIP) as “quite a unique initiative” that can inspire many UK technology companies for business setup in Dubai.

He further remarked, “They are investing in cutting edge innovative projects which have high growth potentials. They can also do the knowledge transfer back to the UAE.”

In an interview with Emirates News Agency WAM, Bradley Jones, the ED of the Joint Secretariat of the UAE-UK Business Council said, “There is nothing to stop the UK and the UAE talking bilaterally about doing additional agreements.”

The UAE-UK business council is focusing on cooperation in renewable energy and other high technology sectors e.g. AI, Agritech, FinTech, advanced manufacturing, education technology, life sciences etc. that can open up new avenues of opportunities for company formation in Dubai UAE by the renewable energy and technology businesses in the UK.