The Loan You Made Without Noticing

Intercompany balances drift. An invoice goes out, the receiving company has other priorities, and a year later the balance is still sitting there because nobody inside the group was ever going to chase it. The FTA transfer pricing guide has a view on what that is, and it is not a receivable.

What the guide expects, and what happens when it does not occur

The starting point is that in transactions between Related Parties or Connected Persons, it is generally expected that any outstanding amount is consistently settled in line with the internal policy of the group — covering the raising of intercompany invoices and the time period for the settlement process.

Notice what the test is measured against. It is not a statutory number of days, and it is not market practice in your sector. It is the group's own agreed terms. A group that documents 30-day terms is held to 30 days; a group that documents 120 is held to 120. Setting a longer term is not the problem — exceeding whatever you set, without a reason, is.

The guide's worked example

Example 24 uses Company X, the UAE parent of a group with wholly owned subsidiaries in countries A and B. It provides services to the subsidiary in country A for a Market Value of AED 10 million, and the same services to the subsidiary in country B for AED 5 million. Company X operates a group-wide 90-day payment term on all transactions, related and independent alike, from the date of invoice.

The subsidiary in country A settles within 90 days. The subsidiary in country B does not, and the outstanding invoice is subsequently observed to have aged for more than 400 days without any commercial or business rationale.

The guide applies Article 34(2) of the Corporate Tax Law — the requirement that results be consistent with those that would have been realised between persons who were not related, under similar circumstances. In the absence of any commercial or business rationale, it concludes, such a delay in payment is not how unrelated persons would carry out a similar transaction.

The example is also quietly instructive on evidence. The two subsidiaries received the same services under the same policy, and one paid on time. That internal contrast is what makes the second position hard to defend: the group demonstrated that its own terms were workable.

Commercial rationale is the exit, and it has to exist at the time

The guide twice qualifies its conclusion with the absence of any commercial or business rationale. That is where a genuine case sits — a customer dispute over the service, a regulatory restriction on remitting funds, a documented forbearance agreed for reasons an independent supplier might also have accepted.

What will not work is a rationale constructed afterwards to explain a balance that simply went unchased. The reason has to be recorded when the decision to wait was taken, because the question being asked is what the parties actually agreed and did.

Once it is a loan, the loan rules follow it

A deemed advance does not sit outside the rest of the framework. Pricing it means pricing a loan: the rate follows the borrower's creditworthiness rather than the lender's cost of funds, and implicit group support is factored into the borrower's rating.

There is a second consequence on the paying side. Interest that arises this way is interest, and the interest deduction limitation applies to it in the ordinary way — so a group can find itself with taxable income in one entity and a restricted deduction in the other.

Where either party is a free zone company, the exposure moves up a level. Compliance with the arm's length principle is a condition of Qualifying Free Zone Person status, so an unpriced deemed loan is a risk to the rate rather than an adjustment to the computation.

Group-wide policies get tested locally

The same part of the guide addresses group-wide transfer pricing policies, and the settlement question is one of the places where a global policy meets local facts. A policy that states payment terms the group does not keep is evidence against the group rather than for it.

What to check

1. Find the group's stated intercompany payment terms, and confirm they are written down somewhere.
2. Age the intercompany receivables against those terms, not against a generic benchmark.
3. For anything beyond term, ask whether a commercial or business rationale existed at the time.
4. Record that rationale contemporaneously where one exists.
5. Price the excess period as a loan, from the end of the agreed term to settlement.
6. Use the borrower's creditworthiness for the rate, not the lender's cost of funds.
7. Check the interest deduction limitation on the paying side.
8. Look for the internal contrast — another group company paying on time makes an unexplained delay harder to defend.

The FTA Transfer Pricing Guide (CTGTP1) is guidance rather than legislation; the operative provision is Article 34 of the Corporate Tax Law. Confirm the position for your own facts before relying on it.