Facts

One UAE-incorporated company transferred its functioning business unit to another UAE-incorporated related party under common ownership and control. The transferred business was a fully operational unit, including employees, established customer and supplier relationships, proprietary systems, inventory, and other supporting infrastructure necessary for continued commercial operations.

Among the transferred assets were certain items classified as held on capital account under IFRS, with a total market value of AED 300 million. These assets would typically qualify for Qualifying Group Relief (QGR) under the UAE Corporate Tax regime. However, other conditions required for QGR were not satisfied in this case.

Importantly, the transfer was not structured as a share-for-assets exchange. No shares or ownership interests were issued by the transferee. Instead, the consideration was provided entirely in cash, amounting to AED 1.2 billion. As a result, Business Restructuring Relief (BRR) was not available, given that one of its core eligibility criteria (consideration in the form of ownership interests) was not met.

The total market value of the transferred business as a going concern was independently estimated at AED 2.8 billion. Nonetheless, in the transferee’s financial statements, only inventory, receivables, and tangible assets were recognized. No gain or loss was recorded in the accounts, and no new intangible assets were capitalized. This accounting treatment reflects the common control nature of the transaction and the constraints under IFRS, particularly with respect to unrecognized intangibles such as client relationships, assembled workforce, and non-contractual know-how.

The transferor company (OpCo) applied a primary transfer pricing adjustment, increasing its taxable income by AED 1.6 billion to reflect the arm’s length value of the business transferred.

Questions

1. Is the transferee entitled to a downward adjustment corresponding to the AED 1.6 billion upward adjustment made by the transferor, thereby reducing its taxable profits?
2. If so, what is the legal and procedural mechanism for implementing the downward adjustment under UAE Corporate Tax and Transfer Pricing rules?

Summary

Upon examination of the applicable accounting and tax standards, we concluded that:

1. The transferee’s entitlement to a downward TP adjustment is not automatic, but conditional upon demonstrating that the value transferred corresponds to identifiable, deductible, or amortizable assets or costs. Without such an allocable subject, the Federal Tax Authority (FTA) may reject the adjustment on the grounds of insufficient linkage between the transferred value and a tax-deductible or amortizable base.
2. Recognition of goodwill as a residual assetб where identifiable components do not fully absorb the underpricing gap is permissible for tax purposes even if IFRS precludes its recognition in transactions under common control. However, the goodwill so recognized must be tested for impairment under IAS 36, and any resulting impairment loss is recognized through profit or loss, thereby reducing taxable income unless expressly disallowed by tax legislation.
3. The arm’s length principle overrides the formalities of group accounting. This means that even in the absence of share-based consideration or separate asset recognition, tax authorities must reconstruct the transaction as if it occurred between independent parties and attribute economic value accordingly.

In conclusion, while the transferee may be entitled to a downward TP adjustment to offset the transferor’s upward adjustment, this entitlement depends on whether the transaction can be recharacterized (under the arm’s length standard) as involving assets or costs that would be deductible or amortizable in the hands of an independent purchaser. Recognition of such an adjustment also requires prior approval from the FTA. The absence of recognized assets under IFRS does not preclude tax recognition under the Corporate Tax regime, but it does heighten the importance of a robust valuation and functional analysis to substantiate the adjustment.

Analysis

Arm’s Length Valuation of a Transferred Business Unit

According to Section5.3.2 of the UAE Corporate Tax Transfer Pricing Guide No. CTGTP1, business restructurings may involve the transfer of a going concern, defined as a “functioning, economically integrated business unit”. The transfer of a going concern in this context means “the transfer of assets, bundled with the ability to perform certain functions and assume certain risks”. The valuation of such a transfer must reflect all remunerable elements that would be recognized between independent parties in comparable circumstances. The Guide further clarifies that “the application of income-based valuation techniques, especially valuation techniques premised on the calculation of the discounted value of projected future income streams or cash flows derived from the exploitation of the business, intangible, or going concern being valued, may be particularly useful when properly applied”.

This approach aligns with OECD Transfer Pricing Guidelines (2022), para 6.27–6.28, which state that goodwill and ongoing concern value are important economic attributes. These components represent, respectively, the residual business value after allocating identifiable assets and the synergistic value of assembled assets operating as a business. Critically, para 6.28 affirms that such value is compensable between independent enterprises and should not be disregarded simply due to terminology.

So, from a Transfer Pricing perspective, the total business, not just the balance sheet assets, must be valued at arm’s length. The OECD exemplifies it in para 9.70 of the TP Guidelines: “An example is the case where a manufacturing activity that used to be performed by M1, one entity of the MNE group, is re-located to another entity, M2 (e.g. to benefit from location savings). Assume M1 transfers to M2 its machinery and equipment, inventories, patents, manufacturing processes and know-how, and key contracts with suppliers and clients. Assume that several employees of M1 are relocated to M2 in order to assist M2 in the start of the manufacturing activity so relocated. Assume such a transfer would be regarded as a transfer of an ongoing concern, should it take place between independent parties. In order to determine the arm’s length remuneration, if any, of such a transfer between associated enterprises, it should be compared with a transfer of an ongoing concern between independent parties rather than with a transfer of isolated assets”.

Arm’s Length Adjustment and Double-Sided Recognition

Section 8.2 of CTGTP1 provides that taxpayers are expected to apply arm’s length pricing in the first instance and may perform Transfer Pricing adjustments (both upward and downward) post-return. However, downward adjustments (i.e. a reduction in taxable income) require approval from the FTA, unlike upward adjustments which should be unilaterally applied.

As clarified in Corporate Tax Returns Guide No. CTGTXR1, the taxpayer must not report downward adjustments in the return unless they have been approved by the FTA. Hence, while the transferor’s upward adjustment increases its taxable income to match the arm’s length price, the transferee’s right to reduce taxable profits by that amount is conditional and procedural.

Necessity of an allocable subject for downward adjustment

While the UAE Corporate Tax regime permits downward adjustments in transfer pricing to reflect transactions at arm’s length values, such adjustments are not automatic and must be substantiated by reference to specific subjects – namely, tangible or intangible assets acquired or deductible expenditures incurred. This requirement is not merely procedural. It reflects a substantive principle embedded in both domestic law and international best practices under the OECD Transfer Pricing Guidelines.

A downward adjustment must correspond to an economically meaningful event (such as the acquisition of an asset or incurrence of an expense) that justifies a reduction in taxable profit. Thus, when a transferee seeks a downward adjustment to reflect the undervaluation of a business acquisition, the excess value not captured in the purchase price must be demonstrably attributable to identifiable items capable of recognition under the tax law.

Without such an allocable subject, the downward adjustment lacks a tax-relevant anchor, and the FTA is likely to reject the adjustment on the grounds that it cannot be tied to a legally cognizable reduction in economic benefit. As such, residual elements like goodwill or going concern value (while relevant to the overall valuation) may not, on their own, support a downward adjustment unless a portion of the value can be disaggregated and linked to separately amortizable or deductible items.

In practical terms, this means that the difference between the consideration paid and the arm’s length value of the business (often referred to as the “underpricing gap”) must be attributed to specific categories of assets or deductible expenses. For each recognizable asset, including:

• Recognizable tangible assets (e.g. equipment, inventories and For each recognizable asset, including:
• recognizable tangible assets such as equipment, inventories, and receivables,
• identifiable intangible assets under IAS 38 and IFRS 3 (e.g., customer contracts, proprietary technology, trademarks),
• Or, where applicable, deductible expenses, such as post-transfer service obligations embedded in the business,

the market value should be restated to reflect the value an independent party would have paid. This implies that, where such assets were recognised for accounting purposes in lower amounts, the underpricing gap is to be used to adjust the initial book value to market value.

Where, after the allocation of market value to all specifically identifiable assets and liabilities, a residual difference remains between the aggregate market value of the business and the net book value of identifiable assets and liabilities, that residual should be characterized as a separately recognized intangible asset – goodwill. While goodwill itself may not always be amortizable or deductible for tax purposes, its recognition is necessary to fully reconstruct the economic reality of the transaction in accordance with the arm’s length principle.

Once goodwill has been recognized on this basis, its subsequent treatment is governed by IAS 36 “Impairment of Assets”, which requires that goodwill be tested for impairment at least annually (IAS36:10b, 11).

In testing for impairment, goodwill must be allocated to the appropriate cash-generating unit (CGU), or the smallest group of CGUs, that is expected to benefit from the synergies of the combination (IAS 36.80). The CGU’s carrying amount, including the allocated goodwill and any relevant corporate assets, is compared with its recoverable amount, defined as the higher of its fair value less costs of disposal and value in use (paragraphs 102 and 6).

If the carrying amount of the CGU exceeds its recoverable amount, an impairment loss is recognized. Pursuant to paragraphs 60, 90 and 104 of IAS 36, an impairment loss is recognized immediately in profit or loss, unless the asset is carried at a revalued amount under another standard (such as IAS 16). For goodwill specifically, IAS 36.124 precludes any subsequent reversal of an impairment loss.

As no specific tax adjustment for goodwill impairment is currently prescribed under the Corporate Tax legislation, the impairment loss recognized in the profit or loss statement under IAS 36 will generally be deductible for corporate tax purposes. In other words, in the absence of express legislative limitations, the goodwill impairment flowing from the application of IFRS will reduce the taxable income of the transferee.

Challenges when no asset is recognized in financial accounts

One central issue in this case is that under IFRS, the transferee does not recognize new assets or intangibles due to the nature of the transaction being under common control. IFRS 3 explicitly excludes such transactions from its scope, and per IAS 38, goodwill and many internally generated intangibles are not separately recognized. Transactions under common control are typically recorded at historical cost.

Hence, it could happen that a difference between market value of separate assets and market value of business will be nowhere to attribute. It could make questionable what costs or assets should favour dounward adjustment.

However, from a tax perspective, transactions between related parties must be assessed in accordance with the arm’s length principle, which requires that:

• The transaction must be assessed as if it were carried out between independent parties, regardless of its actual legal or accounting form.
• The absence of recognized intangible assets in the transferee’s financial statements does not preclude the tax authorities from assigning economic value to those elements and requiring the transaction to be valued at market levels on both ends.

If the transferee’s accounts do not reflect identifiable intangibles, there may be no accounting basis for allocating the excess value (i.e. the difference between the market value of the transferred business and the consideration paid for inventory and receivables). As a result, the FTA may reject the corresponding downward adjustment, in whole or in part, on the basis that no recognized assets exist to which the adjustment could reasonably attach.

Nevertheless, in our view, the absence of accounting recognition does not negate the arm’s length requirement. The FTA is expected to apply the OECD and UAE TP frameworks to determine which assets (if any) would have been recognized and valued by independent parties in comparable circumstances.

In other words, the arm’s length principle functionally reconstructs the transaction into a hypothetical one between unrelated parties. The financial result should then be adjusted to reflect this reconstruction – even if the accounting treatment under common control rules does not produce a gain, loss, or recognized assets.

Accordingly, if an independent buyer would have recognized an amortizable intangible asset (e.g. a contractual customer base), then for tax purposes, that asset should be treated as having been acquired, and a downward adjustment may be available to the transferee. If, however, the unrecognized value corresponds to goodwill or non-identifiable intangibles, the downward adjustment may be denied or deferred, as these components may not be eligible for amortization or deduction under the Corporate Tax Law.

These conclusions are indirectly supported by Clauses (1) and (2) of Article 61 of the Corporate Tax Law.

• Clause 1 provides that “a Taxable Person’s opening balance sheet for Corporate Tax purposes shall be the closing balance sheet prepared for financial reporting purposes under accounting standards …, subject to any conditions or adjustments that may be prescribed by the Minister”;
• Clause (2) further states that ““the opening balance sheet referred to in Clause 1 of this Article shall be prepared taking into consideration the arm’s length principle in accordance with Article 34 of this Decree-Law”.

These provisions imply that the arm’s length principle prevails over group accounting treatments, and the opening tax balance sheet should reflect a reconstructed economic reality, not necessarily the accounting form used for common control transactions. Clause (2) confirms that the arm’s length reconstruction affects not only the recognition of income and losses, but also the recognition and valuation of assets and liabilities recorded in the balance sheet. Therefore, even if certain intangible assets are not recognized under accounting rules, particularly in transactions under common control, they may still be deemed to exist and valued for tax purposes under the arm’s length standard, thereby influencing the opening balance sheet for Corporate Tax computations.

Further support for this proposition is found in paragraph 6.29 of the OECD Transfer Pricing Guidelines (2022), which offers a clear distinction between accounting-based valuations and those required under the transfer pricing framework. It states: “The requirement that goodwill and ongoing concern value be taken into account in pricing transactions in no way implies that the residual measures of goodwill derived for some specific accounting or business valuation purposes are necessarily appropriate measures of the price that would be paid for the transferred business or licence rights, together with their associated goodwill and ongoing concern value, by independent parties. Accounting and business valuation measures of goodwill and ongoing concern value do not, as a general rule, correspond to the arm’s length price of transferred goodwill or ongoing concern value in a transfer pricing analysis”. This guidance makes clear that although financial reporting frameworks (such as IFRS) may rely on residual accounting techniques to identify goodwill or ongoing concern value, such accounting classifications are not determinative in transfer pricing analysis.

The OECD further elaborates that “Depending on the facts and circumstances, however, accounting valuations and the information supporting such valuations can provide a useful starting point in conducting a transfer pricing analysis. The absence of a single precise definition of goodwill makes it essential for taxpayers and tax administrations to describe specifically relevant intangibles in connection with a transfer pricing analysis, and to consider whether independent enterprises would provide compensation for such intangibles in comparable circumstances”. This paragraph reinforces the principle that the arm’s length standard is autonomous from accounting conventions, and that taxpayers and tax authorities must undertake a functional and economic analysis of the transaction, irrespective of how assets (or their absence) are reflected in the financial statements. Accounting treatment may inform the initial understanding of the transaction, but it does not control the legal or tax consequences. The economic reality reconstructed under the arm’s length hypothesis must take precedence, especially where compensation for intangibles, such as customer relationships, assembled workforce, or operational synergies, would have been payable between independent parties.

Accordingly, tax law not only diverges from IFRS in its treatment of related-party restructurings, but affirmatively requires functional reconstruction, asset reclassification, and value reattribution based on hypothetical third-party behavior. The transferee’s eligibility for a downward adjustment must therefore be examined within this tax-legal construct rather than confined by the accounting treatment reflected in the books.

Implications for the Transferee’s Downward Adjustment

The transferee may claim a downward TP adjustment only if it can demonstrate that the value transferred corresponds to deductible or amortizable assets under the UAE tax regime. The FTA is likely to evaluate whether, had this been a transaction between unrelated parties, the transferee would have acquired specific intangible or tangible assets. If such assets (e.g. contractual customer relationships, registered trademarks, non-compete agreements) would have been recognized, the corresponding value may be amortizable and thus eligible for downward adjustment.

Conversely, if the FTA concludes that the excess value relates primarily to goodwill or assembled workforce, both of which are non-amortizable or non-recognized under IFRS and UAE tax lawб the transferee’s adjustment may be rejected or deferred.

The disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.