The Local File plays a crucial role in the UAE’s transfer pricing documentation framework. It provides comprehensive details on a taxpayer’s-controlled transactions (transactions with Related Parties and Connected Persons) during a specific tax period. The UAE has implemented comprehensive Transfer Pricing (TP) rules, largely aligned with the OECD’s BEPS Action 13, which include requirements for maintaining a Local File. These rules are crucial for businesses with related party transactions to ensure compliance with the Arm’s Length Principle (ALP). Businesses operating in the UAE must prepare and maintain a Local File if they meet either of the following criteria:
- The Taxable Person is part of a Multinational Enterprise (MNE) Group with a total consolidated group revenue of AED 3.15 billion or more.
- The Taxable Person’s revenue in the relevant Tax Period is AED 200 million or more.
Even if these thresholds are not met, all transactions with Related Parties and Connected Persons must still adhere to the Arm’s Length Principle, and taxpayers should maintain sufficient records to substantiate this.
The Local File must include key details, such as:
- Information about the local entity-This includes details about the business, its management structure, and strategy.
- A breakdown of all significant controlled transactions involving the entity.
- A clear description of the transactions.
- The value of the transactions.
- Details of the Related Parties involved.
- A functional analysis, identifying the functions performed, assets used, and risks assumed by each party.
- The most appropriate Transfer Pricing method selected and the justification for its selection.
- The application of that method, including a benchmarking analysis to demonstrate arm’s length pricing.
- Financial data used in the analysis.
- Relevant financial information/data of the local entity.
However, Ministerial Decision No. 97 of 2023 and the UAE transfer pricing guidelines (CTGTP1) define specific circumstances where a Taxable Person must document certain controlled transactions in the Local File.
Controlled Transactions Requiring Documentation
All controlled transactions must adhere to the Arm’s Length Principle. However, as per Ministerial Decision No. 97 of 2023, a Taxable Person is required to document the following types of controlled transactions in their Local File:
- Transactions with Non-Resident Persons, except for a Permanent Establishment (PE) of a Non-Resident Person that is taxed at the same corporate tax rate as the Taxable Person (e.g., cross-border transactions).
- Transactions involving Exempt Persons (i.e., entities not subject to Corporate Tax).
- Transactions with a Resident Person who benefits from Small Business Relief.
- Transactions with a Resident Person who is subject to a different corporate tax rate than the Taxable Person (e.g., transactions with a Qualifying Free Zone Person).
Exempted Controlled Transactions
Certain controlled transactions do not require inclusion in a Local File. These include:
- Resident Persons other than those explicitly mentioned above (Exempt Persons, Small Business Relief, different tax rates). This generally means domestic related party transactions between two Resident Persons subject to the same rate of tax are excluded, provided there’s no possibility of tax arbitrage.
- Transactions between the Taxable Person and Natural Persons, provided they operate independently of each other.
- Transactions involving a juridical person that qualifies as a Related Party or a Connected Person solely because they are partners in an Unincorporated Partnership, provided they act independently.
- Transactions with a Permanent Establishment (PE) of a Non-Resident Person, provided the PE is taxed at the same rate as the Taxable Person.
However, even if exempt from Local File requirements, these transactions must still comply with the Arm’s Length Principle. The Federal Tax Authority (FTA) may request supporting documentation to verify the arm’s length nature of these transactions.
Compliance with UAE Transfer Pricing Regulations
The Local File is a key element of the UAE’s transfer pricing compliance requirements, alongside the Master File, Country-by-Country Report (CbCR), and Transfer Pricing Disclosure Form. Businesses meeting the prescribed thresholds must maintain a Local File and other necessary documentation.
The Local File, along with the Master File (if applicable), must be prepared and maintained contemporaneously. It is not required to be submitted automatically with the Corporate Tax Return, but must be submitted to the Federal Tax Authority (FTA) within 30 days of a request.
For companies finding transfer pricing documentation complex, professional transfer pricing advisory services can assist in ensuring compliance with UAE tax regulations.
How BCL Globiz Can Assist with Local File Compliance
BCL Globiz provides expert guidance in navigating the UAE’s transfer pricing documentation requirements, including the preparation and maintenance of the Local File. Our team ensures that businesses comply with Ministerial Decision No. 97 of 2023 and the UAE transfer pricing guidelines (CTGTP1) by accurately documenting controlled transactions and maintaining necessary financial records. We assist in structuring transactions in line with the Arm’s Length Principle, preparing robust documentation, and responding to regulatory queries from the Federal Tax Authority (FTA).
For further details, contact rakesh@bclglobiz.com.
