Dubai and the issue of income tax are currently dominating the headlines in German business and daily newspapers. Since 2021, German tax enforcement authorities have been increasingly investigating cases of tax evasion by German taxpayers in connection with so-called ‘Dubai investments’, using data sets acquired from Dubai. The focus here is on property investments and permanent establishments of German influencers resident in the United Arab Emirates or Dubai. From a tax law perspective, it is also worth noting that the United Arab Emirates and Dubai, as international trade and financial centres, are aligning themselves with globally recognised taxation principles.
Modernisation of the tax system in the United Arab Emirates
Increased multinational cooperation in the field of international taxation has led to national tax authorities worldwide placing greater emphasis on cross-border transactions and investments. In Dubai in particular – which has now become a major economic and investment hub – the German tax authorities are increasingly scrutinising so-called ‘Dubai investments’ made by German taxpayers in order to uncover suspected tax losses at Germany’s expense.
Corporation tax and tax reform: the key changes
The United Arab Emirates (UAE) has hitherto been regarded as a tax-efficient location for individuals and businesses. However, with the entry into force of Federal Law No. 47 of 2022 and the introduction of corporation tax on 1 June 2023, the UAE has implemented a significant reform of its tax system. The introduction of a 9% corporation tax rate and the adoption of OECD-compliant transfer pricing rules represent a significant step towards aligning with international taxation standards. The aim is to increase tax transparency and meet international obligations. For companies with operations or branches in the UAE, this results in substantial compliance, disclosure and documentation requirements.
Arm’s Length Principle and Transaction Review
Under Article 34 of the UAE Corporate Tax Act, the UAE has undertaken to apply the so-called arm’s length principle to transactions between related parties. The application of this fundamental principle of taxation means that transactions between associated enterprises or within group structures must be structured and arranged in the same way as they would be agreed between independent third parties under comparable circumstances.
The UAE’s Federal Tax Authority (FTA) recognises all transfer pricing methods accepted by the OECD. Particular attention is paid to the interquartile range, i.e. the range of arm’s length prices determined through market analyses. If a transaction falls outside this range, there is a risk of a tax adjustment. A similar approach is also adopted under the German Foreign Tax Act, the Income Tax Act and the Corporation Tax Act in the case of a hidden distribution of profits. The arm’s length principle applies to both domestic and cross-border transactions with associated parties and, according to the UAE Transfer Pricing Guide, can be determined in three steps:
1. Identification of related parties or closely associated persons and relevant transactions between these parties
2. Selection of the most appropriate transfer pricing method (comparable uncontrolled price method, resale price method, cost-plus method, net transaction margin method, profit split method)
3. Determination of the arm’s length price
Scope of application
The arm’s length principle applies in particular to ‘related parties’ or ‘connected persons’, i.e. associated companies or legal entities, as well as persons closely associated with them:
- Related parties are companies or individuals who hold a stake of 50 per cent or more in one another, or who exercise joint control or influence over one another. Natural persons who are related up to the fourth degree are also included (Art. 35 VAE-KStG).
- Connected persons are individuals in key roles, such as shareholders, members of the executive board or their relatives (Art. 36 VAE-KStG).
Payments to or between these persons, for example for management services or intra-group financing, are only tax-deductible if they satisfy the arm’s length principle. The recently tightened regulations on intra-group financing in inbound cases under Section 1(3d) of the German Foreign Tax Act (AStG) are currently comparable; these regulations subject intra-group financing arrangements with terms that deviate from arm’s length principles to an adjustment of profits.
Extended documentation requirements
Companies that form part of a multinational group are subject to transfer pricing documentation requirements in the United Arab Emirates. Companies with a turnover exceeding 200 million AED (approx. 47 million EUR) must prepare and maintain both a local file and a master file. If the group’s total consolidated turnover is at least AED 3.15 billion (approx. just under EUR 750 million), the group is also obliged to submit a country-by-country report (CbCR).
Irrespective of this, Article 55 of the VAE Corporation Tax Act stipulates that all VAE taxpayers who carry out transactions with associated companies or related parties during the relevant tax year must disclose the relevant transfer pricing information together with their tax return. Even if there is no obligation to prepare a master file or local file, the FTA may request certain details regarding transactions with associated parties or persons. The documentation must be available by the time the tax return is filed at the latest.
Conclusion
With the introduction of corporation tax and comprehensive transfer pricing regulations, the United Arab Emirates has taken a significant step towards a transparent, international tax system. For businesses, this means that tax structures must be reassessed, transfer pricing systems adjusted and reporting obligations taken seriously in order to avoid tax risks and penalties relating to business relationships with the United Arab Emirates. Furthermore, the UAE has announced its intention to comply with Pillar Two by 2025 and to introduce a so-called ‘Domestic Minimum Top-Up Tax’ to achieve the global minimum tax.
