For business conglomerates and groups operating in the UAE, shifting resources, whether staff, stock, or services, between related entities is part of daily operations. However, when these entities are legally separate, the Federal Tax Authority (FTA) does not treat such movements as internal adjustments and may classify them as taxable supplies.
Managing the VAT implications of intercompany transactions requires a clear understanding of corporate structures and VAT registration status. This guide explains how to manage VAT on transactions between related parties in the UAE with clarity and confidence.
Understanding the classification of entities
Before applying any tax treatment, you must determine the relationship between the two entities involved in the transaction. The VAT treatment depends entirely on whether the entities are part of a Tax Group or if they operate as standalone VAT registrants.
1. Transactions within a Tax Group
Under Article 9 of the Federal Decree-Law No. 8 of 2017, two or more persons conducting business may apply for VAT registration as a Tax Group. A Tax Group allows related UAE entities to be treated as one business for VAT, so transactions between them are not subject to VAT.
If Entity A and Entity B are members of the same Tax Group VAT treatment will be as follows:
- The transaction is disregarded: Supplies between members of the same Tax Group are ignored for VAT purposes.
- No tax invoice required: You do not need to issue a tax invoice for these internal movements.
- Consolidated reporting: The representative member of the group files a single VAT return covering all entities.
This structure is highly beneficial for cash flow, as you do not need to pay VAT on internal charges only to claim it back later.
2. Transactions between separate VAT registrants
If Entity A and Entity B are related parties (part of the same corporate group) but are not in a Tax Group (or are in different Tax Groups):
- Standard VAT rules apply: The transaction is treated as a supply of goods or services.
- Tax invoice is mandatory: Entity A must issue a compliant tax invoice to Entity B.
- VAT must be charged: Standard rate VAT (5%) usually applies.
- Input tax recovery: Entity B can claim the VAT charged by Entity A as input tax, provided the standard recovery conditions are met.
The valuation trap: Related party rules
Even where entities are related, if they are not part of the same VAT Tax Group, supplies between them remain taxable and are subject to special valuation rules. When dealing with arm's length customers, the value of the supply is simply the price paid. However, when dealing with related parties (intercompany transactions), the FTA has specific anti-avoidance provisions regarding valuation.
According to Article 37 of the VAT Decree-Law, the value of the supply must be the Market Value (not the transaction price) for VAT calculation if:
- The value of the supply is less than the market value; AND
- The recipient of the supply (the buying entity) is not entitled to recover the full Input Tax.
Example:
If a parent company provides management services to a subsidiary (which is a separate VAT registrant) for AED 5,000, but the market value of those services is AED 10,000, and the subsidiary deals in exempt supplies (like residential real estate or local transport) and cannot claim full VAT recovery, the parent company must calculate VAT on AED 10,000, not AED 5,000.
How to handle VAT on intercompany transactions in practice
To correctly handle VAT on intercompany transactions in the UAE, businesses should follow a structured approach:
- Confirm VAT registration status
First, determine whether the entities are part of the same VAT Tax Group or are separately VAT registered. This single step dictates whether VAT applies at all. - Identify the nature of the supply
Establish whether the transaction involves goods, services, cost recharges, or staff secondments. VAT treatment depends on the nature of what is being supplied. - Determine the correct value of supply
- For arm’s length pricing, VAT is charged on the agreed transaction value.
- For related parties that are separately registered, assess whether Article 37 (market value rules) applies, particularly if the recipient cannot recover full input VAT.
- Apply the correct VAT treatment
- Same Tax Group: Disregard the transaction for VAT purposes.
- Separate VAT registrants: Charge VAT at the standard rate (5%), unless an exemption or zero-rating applies.
- Issue and retain proper documentation
Raise FTA-compliant tax invoices for taxable supplies, maintain intercompany agreements, and ensure accounting entries accurately reflect the transaction. - Report VAT correctly
Include taxable intercompany transactions in the VAT return of the supplying entity (or the representative member, in case of a Tax Group).
Managing documentation and compliance
Regardless of the relationship, documentation is your first line of defence during an FTA audit.
- Intercompany agreements: Ensure distinct contracts exist outlining the scope of goods or services provided between entities.
- Invoicing: Even if you are in a Tax Group, maintaining internal "shadow invoices" or transfer notes is wise for management accounting, though not required for VAT. For separate entities, a full Tax Invoice is non-negotiable.
- Payment trails: Ensure that accounting entries reflect the settlement of these invoices, or that intercompany loan accounts are reconciled.
To ensure your calculations are precise before generating invoices, using a reliable VAT calculator is essential. It allows your finance team to quickly verify tax amounts on complex intercompany pricing structures before finalising the entry.
However, manual calculations are prone to error. As your group grows, relying on spreadsheets or basic tools becomes risky. This is where a robust VAT software becomes the backbone of your financial compliance.
Simplifying VAT compliance with TallyPrime
Managing intercompany transactions, especially when monitoring market values and tax group exclusions, can become a significant operational challenge for finance teams. TallyPrime is designed to handle the complexities of the UAE VAT landscape with precision and ease.
Automated tax treatment
TallyPrime allows you to define the tax profile of each ledger. Whether you are recording a journal voucher for a cross-charge or a sales invoice to a subsidiary, TallyPrime applies the correct VAT rules automatically.
Handling Tax Groups
If you manage a Tax Group, TallyPrime’s consolidated reporting capabilities allow you to combine data from multiple companies (entities) to generate a single VAT return. It helps you segregate which transactions are intra-group (disregarded) and which are external (taxable), ensuring your filing is accurate.
Handle multiple companies
For various reasons such as new branch, new business vertical, more one legal entity etc., business requires multi-company support with each company having distinct 'books'. With Tally, you can manage multiple companies and easily handle the complexities associated with it.
Handling VAT on intercompany transactions requires a careful balance of accounting accuracy and regulatory understanding. The treatment depends on whether businesses operate as a Tax Group or as separate entities, and whether transaction values align with market standards. Using dependable VAT software helps ensure these calculations and classifications are handled correctly.
Rather than relying on manual spreadsheets, solutions like TallyPrime enable businesses to record, classify, and report intercompany transactions accurately. This reduces compliance risks, supports correct VAT reporting, and helps businesses stay aligned with UAE VAT regulations.
