Benchmarking Expense Sharing Between Related Parties: A Guide for UAE Businesses

Related party transactions (RPTs) are a crucial aspect of business operations, particularly in group companies, subsidiaries, and entities with common ownership. One of the key areas that require careful attention is expense sharing between related parties. Ensuring that expenses are allocated fairly and at arm’s length is essential for compliance with UAE tax regulations, including VAT and corporate tax, as well as global transfer pricing principles.

This blog explores best practices for benchmarking expense sharing between related parties in the UAE, referencing FTA guidelines, OECD transfer pricing principles, and industry standards.

Understanding Expense Sharing in Related Party Transactions

When multiple related entities share resources such as office space, employees, technology, management services, or marketing expenses, it is essential to ensure that the cost allocation is reasonable, justifiable, and in compliance with tax laws.

Some of the key types of shared expenses include:

Administrative Expenses – Rent, utilities, office supplies
Employee Costs – Salaries, benefits, training expenses
Technology Costs – Software licenses, IT support, cybersecurity
Marketing and Branding – Advertising, sponsorships, promotional costs
Management Fees – Executive salaries, board member costs, consulting fees

If these costs are not properly allocated or are not supported by benchmarking studies, they may lead to tax disputes, disallowed deductions, or penalties from regulatory authorities.

Regulatory Considerations in the UAE

The UAE has specific regulations governing related party transactions to prevent tax evasion and ensure fair pricing. Businesses must comply with the following:

1) Corporate Tax Law (Federal Decree-Law No. 47 of 2022)

Requires that transactions with related parties follow the arm’s length principle (ALP).

Related party transactions should be properly documented and supported with benchmarking data.

2) UAE VAT Law (Federal Decree-Law No. 8 of 2017)

Expense sharing arrangements may require proper VAT treatment.

Certain transactions may be subject to VAT if the cost-sharing arrangement constitutes a supply of services.

3) OECD Transfer Pricing Guidelines

UAE businesses, particularly those engaging in cross-border transactions, must align their expense-sharing policies with OECD transfer pricing principles.

Transactions must be at market rates, ensuring that no entity benefits unfairly.

Best Practices for Expense Sharing Compliance

1) Maintain Proper Documentation

Draft formal Intercompany Agreements (ICAs) detailing how costs are allocated.

Retain invoices, service agreements, and correspondence supporting the expense-sharing arrangements.

2) Conduct Periodic Benchmarking Studies

Use external benchmarking reports or industry databases to justify pricing models.

Update cost-sharing arrangements annually to reflect market conditions.

3) Ensure VAT Compliance

Determine if expense-sharing arrangements qualify as taxable supplies.

If VAT applies, ensure proper invoice issuance and reporting in VAT returns.

4) Audit Expense Allocations

Conduct internal reviews to check for consistency and compliance with UAE tax laws.

Ensure that expenses are not overstated to artificially reduce taxable income.

Consequences of Non-Compliance

a) Tax Penalties

If expense-sharing arrangements do not follow arm’s length principles, the FTA may adjust taxable income, leading to higher tax liabilities.

Incorrect VAT treatment may result in penalties for non-compliance.

b) Transfer Pricing Audits

The UAE tax authority may request benchmarking studies and documentation of related party transactions.

Businesses must ensure their cost allocations can withstand tax audits.

c) Reputational Risks

Mismanagement of intercompany transactions can damage relationships between related entities and investors.

Unclear expense allocations may create internal disputes among shareholders.

Conclusion

Proper benchmarking of expense-sharing arrangements ensures compliance with UAE tax laws, minimizes audit risks, and promotes fair cost distribution. Businesses must:

Use transparent and justifiable allocation methods.
Maintain robust documentation and intercompany agreements.
Stay updated with UAE FTA guidelines and OECD transfer pricing rules.

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