Intercompany transactions are exchanges of goods, services, financing, or intellectual property between related entities within the same group. Transfer pricing refers to the method of valuing such intra‑group transactions, ideally at “arm’s‑length” as if the parties were independent. In the UAE’s new corporate tax era, correct transfer pricing is critical: corporate tax companies in Dubai and corporate tax firms in the UAE are increasingly advising multinationals on intercompany pricing and compliance. This guide explains various settlement models for intercompany transactions, offering practical insights for businesses and their advisors.
Why Intercompany Transactions Are Important Under UAE Corporate Tax
- Impact on Taxable Income : Intercompany transactions, including goods, services, financing, and intellectual property, directly affect reported profits and corporate tax liabilities in the UAE.
- Arm’s-Length Requirement : Under the UAE corporate tax regime, Taxable Persons must ensure related-party transactions reflect arm’s-length pricing to comply with FTA rules.
- Risk of Mispricing : Incorrectly stated margins (too high or too low) can lead to under- or over-declaration of profits, triggering tax adjustments, penalties, or potential double taxation.
- Role of Corporate Tax Advisors : Corporate tax companies in Dubai and corporate tax firms in the UAE guide multinationals in designing defensible transfer-pricing policies aligned with local regulations.
- Documentation & Compliance : Properly documented intercompany transactions help businesses withstand FTA audits and ensure full compliance with UAE transfer-pricing requirements.
Legal & Regulatory Framework in UAE
The UAE’s transfer‑pricing rules stem from Federal Decree‑Law No. 47 of 2022 on Corporate Tax, effective for tax periods beginning June 1, 2023. The subsequent Ministerial Decision No. 97 of 2023, along with the 2023 UAE Transfer Pricing Guide, aligns the UAE framework with the OECD Transfer Pricing Guidelines. Companies that meet certain thresholds, e.g., annual revenue of AED 200 million or more, or being part of a multinational enterprise (MNE) group with consolidated revenue ≥ AED 3.15 billion, must maintain a Master File and a Local File. When required, a Country-by-Country Report (CbCR) may also apply. Corporate tax companies in Dubai now frequently advise clients on choosing compliant settlement models and preparing robust documentation to minimize risk.
Types of Settlement Models for Intercompany Transactions
- Cost Plus Model: Under this model, the service‑ or manufacturing‑providing entity charges a fixed percentage markup over its cost base. It is simple, transparent, and particularly suitable when cost bases are stable and traceable. Corporate tax firms in the UAE often recommend this approach for intra‑group services or manufacturing, where costs are clear and overheads consistent.
- Resale Minus Model: Commonly used by distributors or resellers: the intercompany margin is determined by subtracting a gross margin from the resale price. This model effectively reflects distribution and resale risk. In the UAE, groups with entities functioning as distributors or resellers, this model helps align intragroup margins with market realities.
- Transactional Net Margin Method (TNMM): One of the most frequently used transfer pricing methods. Under TNMM, the net profit margin achieved in the controlled transaction is benchmarked against comparable third‑party (unrelated) companies. Because of its flexibility and defensibility under documentation rules, TNMM is often preferred by corporate tax companies in Dubai when preparing TP reports.
- Profit Split Method : Used when both parties to the intercompany transaction (e.g., one provides IP/R&D, another manufacturing or marketing) contribute significant value. Combined profits are allocated between entities based on their relative contributions for example, R&D, manufacturing, marketing, or distribution. This model is more complex but useful when transactions are highly integrated, such as cross‑border flows of IP, production, and marketing functions.
- Other Models / Hybrid Models : For transactions involving intra‑group financing (loans), royalties on intellectual property, or mixed arrangements, hybrid or tailored TP models may be used. For example: interest‑bearing loan models, royalty models for IP licensing, or mixed‑method arrangements combining cost‑plus for services with profit‑split for IP value.
Practical Steps to Implement a Settlement Model
- Analyse your Group Structure: Map all intercompany flows: goods, services, loans, IP transfers across jurisdictions and functions.
- Select the Appropriate TP Method: Based on business model and functions performed, choose from cost-plus, resale-minus, TNMM, profit split, or a hybrid model.
- Perform Benchmarking: Use external data (comparable independent companies) to benchmark profits or margins. Corporate tax firms in the UAE can support benchmarking studies and defensible analyses.
- Document Policies: Prepare a Master File (group‑level overview), a Local File (detailed UAE transactions), and a TP study/report. Maintain contemporaneous documentation, intercompany agreements, invoices, and functional analyses.
- Monitor and Adjust : As business conditions, costs, or operations evolve, regularly review margins and re‑assess whether the chosen settlement model remains appropriate.
Best Practices & Common Pitfalls
Maintain robust documentation; never rely on “just guessed” margins. Independent comparable are far more defensible than group-only data.
- Use clear functional and risk analysis along with real cost and financial data.
- Pay attention to currency fluctuations or transfer‑price risk in cross-border cash flows.
- Regularly review and, if needed, adjust your transfer‑pricing model as your group’s business evolves.
- Work with reputable corporate tax companies in Dubai or corporate tax firms in the UAE to ensure compliance, audit readiness, and tax efficiency.
Conclusion
As the UAE corporate tax landscape evolves, implementing effective intercompany pricing and transfer‑pricing strategies is more important than ever. Selecting the right settlement model, supported by accurate documentation and thorough benchmarking, ensures both compliance and optimized tax outcomes. Partnering with Reyson’s expert corporate tax team in Dubai provides businesses with tailored, practical guidance to navigate transfer‑pricing requirements confidently and efficiently.
