Loan Pricing in the UAE: What Treasury Needs to Know

Until recently, most UAE corporate entities were not subject to corporate income tax. This changed with the Ministry of Finance’s announcement on 31 January 2022, introducing a federal corporate tax regime applicable to financial years starting on or after 1 June 2023. The new regime also formalised the UAE’s transfer pricing framework as part of its commitment to the OECD BEPS standards.

Federal Decree-Law No. 47 of 2022 sets out the corporate tax rules and embeds transfer pricing requirements under Articles 34–36 and 55. In addition to the Federal Decree-Law No. 47, the UAE’s Ministry of Finance and Federal Tax Authority also issued additional rules and guidance specific to transfer pricing:

• Ministerial Decision No. 97 of 2023 – Sets out the conditions for the preparation of Master Files and Local Files in line with OECD BEPS Action 13.

• UAE Transfer Pricing Guide – Detailed guidance on the practical impact and implementation of transfer pricing regulations. The guide was prepared in alignment with the OECD’s Transfer Pricing Guidelines.

The incorporation of these rules, together with the growing attention from tax authorities on the Transfer Pricing of Intra-Group Loans, has significantly increased the focus of tax and treasury teams on the importance of transfer pricing in the region.

Importance for treasury teams

Over two years on from the UAE’s adoption of a formal corporate income tax regime, the region has positioned itself as a potential financial hub for multinationals to set up their centralised group finance and treasury functions. The UAE’s economic reforms and growing alignment with international financial standards further strengthen its case as a pragmatic and effective financial hub.

Multinationals are increasingly looking towards centralised, in-house financing functions to more effectively navigate variables between markets such as regulatory requirements, currency exposures, and broader liquidity and cash flow targets.

As more multinationals set up financing hubs in the UAE, scrutiny from the Federal Tax Authority will increase accordingly, particularly with a legitimate transfer pricing regime now in place. This means that both treasury teams and tax departments need to price intra-group loans on an arm’s length basis.

Alignment with the OECD TP Guidelines

The UAE follows the OECD TP Guidelines Chapter X for the transfer pricing of intra-group financial transactions, with additional local guidance provided in section 7.1.3.2 of the UAE Transfer Pricing Guide. Intercompany loans must reflect arm’s length terms, including loan amount, maturity, repayment terms, and arm’s length interest rates.

In practice, a 4-step process should be followed to comply with these requirements:

Step 1: As a first step, the terms and conditions should be reviewed to ensure their commercial rationale and that they reflect the actual economic reality of the parties. In this sense, special consideration should be given to the loan amount and whether an independent party would extend such an amount to the borrower. To this end, the so-called Debt Capacity Analyses are performed.

Step 2: As a second step, a credit rating analysis should be performed. While the recommended approach is to follow a bottom-up approach, based on the standalone credit rating of the entity adjusted for group support, in some cases a more simplified top-down credit rating approach can also be considered acceptable.

Step 3: As a third step, the pricing analysis is performed, typically by application of the external CUP method, identifying comparable third-party transactions with similar characteristics. Of course, the necessary comparability adjustments should be performed to reflect the differences between the external comparables and the loan under analysis.

Step 4: Finally, the analysis should be documented in a Transfer Pricing Report, explaining in a transparent manner the analysis performed in the previous steps. It is important to have legal documentation in place, reflecting the terms and conditions of the loan that have been considered during the analysis.

Interest limitation rules:

Alongside traditional transfer pricing regulations, the UAE also enacted interest deductibility rules in Article 30 of the Ministerial Decision No. 120 of 2023. The provisions are broadly modelled after the OECD’s BEPS Action 4. These interest limitation rules should be considered alongside transfer pricing regulations. In principle, net interest expense in the UAE is deductible only up to 30% of the borrower’s adjusted EBITDA. This rule only applies to cumulative interest expense greater than AED 12 million in a given year.

Article 28(1)(b) provides further rules that should apply specifically to intercompany arrangements. In addition to the foundational rule, any intercompany interest expense is non-deductible if:

• The financial arrangement lacks economic substance or commercial purpose; and
• The lender is not subject to a corporate tax rate of more than 9%; and
• The main purpose or one of the main purposes of the loan was to obtain a tax advantage.

Each of these must be proven for any interest deductions to be denied. These rules function to mitigate intergroup profit shifting and hybrid arrangements.

Zanders Transfer Pricing Software as a tool:

As tax authorities intensify their scrutiny, it is essential for companies to carefully adhere to the recommendations outlined above.  

Does this mean additional time and resources are required? Not necessarily. Technology provides an opportunity to minimize compliance risks while freeing up valuable time and resources. The Zanders Transfer Pricing Software is an innovative, cloud-based solution designed to automate the transfer pricing compliance of financial transactions.  

With over eight years of experience and trusted by more than 90 multinational corporations, our platform is the market-leading solution for intra-group loans, guarantees, and cash pool transactions. 

Our clients trust us because we provide: 

• Transparent and high-quality embedded intercompany rating models. 
• A pricing model based on an automated search for comparable transactions. 
• Automatically generated, 40-page OECD-compliant Transfer Pricing reports. 
• Debt capacity analyses to support the quantum of debt. 
• Legal documentation aligned with the Transfer Pricing analysis. 
• Benchmark rates, sovereign spreads, and bond data included in the subscription. 
• Expert support from our Transfer Pricing specialists. 
• Quick and easy onboarding—completed within a day! 

If you are interested in exploring how the Transfer Pricing Software could optimize your transfer pricing processes for financial arrangements, let us know in the contact form below.