The introduction of UAE Corporate Tax has fundamentally reshaped how businesses must approach related-party transactions, particularly intercompany financing. With the Federal Tax Authority (FTA) adopting OECD-aligned Transfer Pricing (TP) rules, companies must ensure that loans, advances, and financial support between group entities are priced at arm’s length. At Stratify Consulting Group, we work closely with clients across industries to navigate these complex requirements, ensuring both compliance and tax efficiency.
Why Intercompany Financing Matters
Intercompany financing has become one of the most scrutinized areas of transfer pricing. Whether it’s a free zone holding company advancing funds to its mainland subsidiary, or an overseas parent extending loans to its UAE entity, these arrangements directly impact taxable profits, customs values, and group liquidity management.
The FTA, like other global regulators, is alert to the risks of:
- Profit shifting through artificially low or high interest rates.
- Base erosion where costs are overstated in the UAE.
- Non-arm’s length conditions that distort the fair value of transactions.
Key Considerations for UAE Groups
1. Credit Rating Analysis
Every benchmarking exercise begins with a thorough creditworthiness assessment of the borrower entity. Even if the group is financially strong overall, each subsidiary’s financials must be tested to determine an implied credit rating.
2. Benchmarking Interest Rates
Once the borrower profile is established, databases such as Refinitiv, Bloomberg, or LoanConnector are used to identify comparable loans. Filters applied include:
- Credit rating (BB, BBB, etc.)
- Tenor (short/long term)
- Security (secured/unsecured)
- Currency denomination
From this, an arm’s length range of interest rates is derived—often expressed as an interquartile range.
3. Currency and Tenor Adjustments
Many intercompany loans in the UAE are denominated in AED or USD. Where data in other currencies is used, adjustments must be made using Refinitiv forward curves or similar tools. Likewise, differences in tenor and collateral require risk-based adjustments.
4. Documentation & Compliance
The FTA expects taxpayers to maintain robust TP documentation demonstrating that intercompany loans are priced at market levels. This includes:
- Loan agreements
- Credit rating analysis
- Comparable data and adjustment methodology
- Conclusion on arm’s length interest rates
Practical Challenges for UAE Businesses
- Historic loans: Many groups have existing intercompany balances that were never priced with TP in mind. These now require retrospective benchmarking and possibly restructuring
- Free zone vs mainland dynamics: Free zone entities often act as financing hubs, but loans to mainland companies trigger customs, VAT, and CT implications.
- Cash pooling: As UAE businesses centralize treasury functions, ensuring arm’s length pricing of notional pooling and sweeping arrangements becomes critical.
How Stratify Can Help
At Stratify Consulting Group, we support clients by:
- Conducting credit rating assessments using best-in-class models.
- Performing benchmarking studies leveraging GCC/ global databases.
- Designing intercompany financing policies tailored to group structures.
- Assisting with FTA audit defense, including preparation of Local File.
- Advising on tax-efficient structures for group financing under UAE Corporate Tax.
Conclusion
Transfer Pricing compliance in intercompany financing is no longer optional—it is a regulatory expectation. By proactively aligning financing structures with OECD and UAE TP principles, businesses can safeguard themselves against FTA challenges, penalties, and double taxation.
At Stratify, our philosophy is simple: combine deep technical expertise with practical business insight to deliver solutions that stand up to both regulators and commercial reality.
