Corporate Tax in UAE - Transfer Pricing plays a key role

UAE is planning to introduce Corporate Income tax (CIT) starting from 2023. All companies undertaking the business in UAE are required to comply with the upcoming CIT. This means that even the Free Zone Entities (FZE) which will continue to enjoy the tax free status will have to undertake certain compliances. FZE's are currently required to comply with Economic Substance Regulation (ESR) which requires the companies to prove that they are actually conducting the business through the respective free zone and they are not merely created to obtain any tax incentive.

Introduction of CIT will also include the compliance with the Transfer Pricing Provisions in relation to the cross border transactions being undertaken by the FZE. It implies that the Mutinational Entities (MNEs) operating through a FZE in UAE will now require to prove that the profits earned by them in the Free Zone is correct and are in sync with the business activities undertaken by them in UAE. Further, the MNEs which are required to comply with the Country by Country Reporting (CbCR) have to ensure that the reporting of the details of the UAE Free Zone entity is in accordance with the overall functions being undertaken by the respective entities.

Further, the introduction of transfer pricing provisions will also require the MNEs to not just comply with the UAE requirements but also to ascertain in their home country as to whether the transfer pricing documentation prepared by them for the home country is covering the aspects in relation to the business carried out by a FZE in UAE and if they can continue to consider the home country entity as a least complex entity for the purpose of transfer pricing documentation. This also require the MNEs to undertake changes in their group transfer pricing documentation to align the attribution of the profits in accordance with the OECD Guidelines.

ESR requirements alongwith Transfer pricing regulation will also effect the position of MNEs in relation to Place of Effective Management (PoEM) of the FZEs. As per the local tax laws of most of the countries, place of effective management is used to determine the residential status of the respective company. In case the FZE entity proves that they have economic substance in UAE and if the PoEM is not being justified, then the FZEs may be liable to pay taxes in their home country basis the PoEM. This becomes relevant also because UAE is a signatory to the Multilateral Administrative Agreement on Automatic Exchange of Information (AEOI).

Based on the above, it can be concluded that the preparation of the robust transfer pricing documentation becomes essential as the same may impact the taxability of the FZE not just in relation to the upcoming UAE CIT but also the taxes paid by the MNE Group in their home country.