As part of the usual transactions performed between Related parties, Reimbursement transactions may arise that in many cases are undertaken to facilitate the transactions in a smoother way. It is in essence a transaction that has been occurred as a matter of logistic convenience.
Sometimes, a Group company may arrange and pay for, on behalf of its Related Parties or Connected Persons, goods or services acquired from various vendors. These are generally called pass-through costs and are subject to reimbursement. A question may arise as to whether the Group company that arranges and pays for such goods or services should include a profit element when recharging these costs to Related Parties or Connected Persons.
Criteria for non-marked up reimbursements
The Group Entities may recharge the costs incurred from vendors to the Related Parties or Connected Persons without applying any profit element or mark-up, provided that the following conditions are met:
- the goods or services acquired are expressly requested by, and are intended for the benefit of, the Related Parties or Connected Persons;
- the Group service provider functions purely as a paying agent and does not, at any stage, enhance or modify the value of the goods or services acquired; and
- the legal or contractual obligation to bear the cost of the acquired goods or services lies with the Related Parties or Connected Persons. This requirement may still be considered satisfied even where, pursuant to an inter-company agreement, the Group service provider assumes the legal or contractual responsibility to make payment to the vendors.
Nevertheless, the Group service provider should evaluate the necessity of charging an appropriate arm’s length margin in respect of its role in arranging and facilitating payment for the acquired goods or services on behalf of its Related Parties or Connected Persons. The determination of such a margin should be informed by, but not restricted to, the aggregate costs incurred in performing these functions, and should duly consider the Functions performed, Assets utilised and Risks borne by the entities to understand the nature of the services rendered and the degree of value addition provided to the Related Parties or Connected Persons.
Let’s explore through an example.
ABC LLC, is the parent entity of an MNE Group based in the UAE. It owns 100% of the shares in subsidiaries located in India and Singapore. ABC LLC operates a centralized real estate management team that handles all property-related matters for the Group.
The subsidiary in Singapore approaches the real estate team to secure additional warehouse space to support its operations. Acting on this request, the real estate team conducts a tender process, evaluates proposals, and facilitates the entire leasing process.
Under the final arrangement, the lease agreement is executed between ABC LLC and the property owner, with ABC LLC directly making the lease payments to the property owner.
In determining the appropriate transfer pricing, ABC LLC should apply an arm’s length mark-up to the costs associated with providing real estate management services for the warehouse lease arrangement. ABC LLC is also expected to recover the actual lease rental costs from its subsidiary without any additional mark-up.
Conclusion
Where a Group company incurs costs purely on behalf of Related Parties or Connected Persons without adding value, such expenses can be reimbursed without a mark-up. However, where the company performs functions or adds value, an arm’s length mark-up should be applied to those service costs, while true pass-through costs should be recovered at cost. Thus, the decision to add a mark-up and quantum of mark-up comes down to the specifics of the activities performed and the value addition.
For businesses looking to explore all available methods, check out our full guide on accepted transfer pricing methods in the UAE.
How BCL Globiz Helps
Structuring reimbursements and pass-through costs in line with transfer pricing principles requires a nuanced understanding of both commercial realities and regulatory expectations. At BCL Globiz, we offer strategic, customized support to help businesses navigate these complexities. Our team works closely with clients to conduct functional and risk analyses, perform benchmarking studies, and prepare defensible documentation that supports the arm’s length nature of such arrangements. With deep expertise in UAE tax regulations and global best practices, we ensure your transfer pricing structures are not only compliant but also optimized to withstand scrutiny. Whether you’re dealing with intra-group reimbursements or cost allocations, BCL Globiz helps you structure them with clarity and confidence—minimizing risk and ensuring smooth audit outcomes.
For further assistance, reach out to our expert rakesh@bclglobiz.com and check out our website www.bcl.ae.
Companies must also be mindful of the transfer pricing disclosure requirements in the UAE when preparing such documentation.
