Intercompany Eliminations
UAE

IFRS 10 intercompany eliminations in UAE: IFRS Standards as issued by the IASB (adopted as the financial reporting framework under Federal Decree-Law No. 32 of 2021 on Commercial Companies and UAE Securities and Commodities Authority requirements)

UAE groups prepare consolidated financial statements under IFRS Standards as issued by the IASB. The UAE adopted IFRS as the mandatory financial reporting framework for listed companies through SCA Board Decision No. 3/R of 2015, and the Federal Decree-Law No. 32 of 2021 on Commercial Companies requires companies to prepare financial statements in accordance with internationally recognised accounting standards (interpreted as IFRS). IFRS 10.B86 applies in full, requiring elimination of all intragroup transactions, balances, income, and expenses. The UAE doesn't have a separate local GAAP for consolidated financial statements; IFRS is the applicable framework for all group reporting. UAE group structures reflect the country's distinctive business environment. The UAE consists of seven emirates, each with its own commercial legislation and free zone authorities. A UAE group may include entities registered in the mainland (under the Department of Economic Development), entities in free zones (DIFC, ADGM, JAFZA, DAFZA, and dozens of others), and entities in other GCC countries. Free zone entities often have different ownership rules (historically, free zone entities could be 100% foreign-owned while mainland entities required a UAE national partner holding at least 51%, though the 2020 amendments to the Commercial Companies Law expanded 100% foreign ownership to mainland entities in many sectors). The intercompany transactions between mainland and free zone entities, between different free zones, and between UAE and overseas entities all require elimination at consolidation. The introduction of UAE corporate income tax (Federal Decree-Law No. 47 of 2022, effective for financial years starting on or after 1 June 2023) at a rate of 9% on taxable income exceeding AED 375,000 has changed the intercompany dynamics within UAE groups. Before June 2023, the UAE had no federal corporate income tax (except for oil companies and foreign bank branches), so intercompany pricing had no domestic tax implications. Now, transfer pricing between UAE group entities is subject to arm's length requirements under Article 34-38 of the Corporate Tax Law, and intercompany transactions affect each entity's taxable income. This is a fundamental shift for UAE groups, many of which have historically managed intercompany flows without transfer pricing documentation.

Regulatory context: Securities and Commodities Authority (SCA) for listed entity regulation; Ministry of Economy for company registration and oversight; UAE Internal Audit Association and local audit licensing authorities (Department of Economic Development in each emirate)

The SCA regulates companies listed on the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM). SCA Decision No. 3/R of 2015 requires listed companies to prepare consolidated financial statements under IFRS and to have them audited by an SCA-registered auditor. The SCA reviews financial statements of listed companies and has the power to require restatements if consolidation errors are identified. The SCA's governance and disclosure requirements (Board Decision No. 3/R.M of 2020) include specific provisions for related party transactions and require disclosure of all transactions between group entities and related parties. The DIFC (Dubai International Financial Centre) and ADGM (Abu Dhabi Global Market) are financial free zones with their own regulatory frameworks. The DFSA (Dubai Financial Services Authority) and the FSRA (Financial Services Regulatory Authority of ADGM) regulate financial services entities within their respective free zones. Entities regulated by the DFSA or FSRA must comply with IFRS and the respective regulator's prudential rules, which include requirements for intragroup exposure reporting. For financial services groups operating through DIFC or ADGM entities, the intercompany elimination work must satisfy both the group audit requirements and the regulated entity's prudential reporting obligations. The UAE Ministry of Economy, through Federal Decree-Law No. 32 of 2021, establishes the general framework for company financial reporting. The law requires companies to appoint auditors licensed in the UAE and to prepare financial statements in accordance with IFRS. While the Ministry doesn't conduct financial reporting reviews comparable to the FRC or AFM, its role in setting the legal framework means that the consolidation requirements are grounded in the Commercial Companies Law.

Practical guidance for UAE

For UAE groups, the first challenge is often identifying the full consolidation scope. A single UAE business owner may operate through multiple entities across different emirates and free zones, with separate commercial licences for different activities. Some of these entities may not have been included in previous consolidations because they were viewed as separate businesses rather than as part of a group. Under IFRS 10, control is the criterion, and common ownership by the same individual or family typically establishes control. The auditor should request a complete list of all entities in which the shareholders (or their family members) hold an interest and assess whether each entity falls within the IFRS 10 consolidation scope. The mainland/free zone structure creates specific intercompany flows. A mainland entity may sell products to end customers while sourcing from a free zone entity that imports goods duty-free. The free zone entity sells to the mainland entity at a transfer price, generating intercompany revenue, cost of sales, and a receivable/payable that must be eliminated. Since the introduction of corporate tax, the transfer price now has tax consequences, and groups are establishing transfer pricing policies for the first time. The auditor should obtain whatever transfer pricing documentation exists and verify that both entities recorded the intercompany transactions consistently. For UAE groups with entities in the DIFC or ADGM, these free zones operate under common law legal systems (based on English law) with separate company registration requirements. An entity registered in the DIFC is legally distinct from an entity registered in mainland Dubai, even if they share the same parent. Intercompany transactions between DIFC and mainland entities require the same elimination treatment as any other intragroup transactions.

Audit expectations

UAE audit quality oversight is evolving. The SCA has increased its focus on audit quality for listed company auditors, including requirements for audit firm rotation and enhanced quality control standards. While the UAE doesn't yet have an inspection regime as established as the FRC's AQR or CPAB's inspection programme, the direction of travel is towards greater scrutiny. Auditors of SCA-listed groups should expect that the consolidation process, including intercompany elimination, will receive increasing attention from regulators. For DFSA-regulated and FSRA-regulated entities, the audit quality expectations are higher, aligned with international standards for regulated financial services entities.

UAE-specific considerations

The introduction of UAE corporate tax in 2023 fundamentally changed the intercompany dynamics. Article 26 of the Corporate Tax Law allows a "Qualifying Group" relief that permits transfers of assets and liabilities between group members at carrying amount (rather than market value) without triggering a taxable gain. To qualify, both entities must be UAE tax residents (or have a permanent establishment in the UAE), the transferor must hold at least 75% of the transferee (or vice versa, or both are 75% held by the same entity), and neither entity can be an exempt person or a qualifying free zone person benefiting from the 0% rate. For the auditor, this means that intragroup asset transfers within a qualifying group have no tax consequence at the entity level, but the financial reporting elimination still requires elimination of any gain or loss at consolidation. Free zone entities that meet the conditions for "Qualifying Free Zone Person" (QFZP) status benefit from a 0% corporate tax rate on qualifying income. Intercompany transactions between a QFZP and a mainland entity (or a non-qualifying free zone entity) are subject to transfer pricing rules at arm's length under Article 34. If the intercompany pricing doesn't satisfy the arm's length standard, the Federal Tax Authority (FTA) can adjust the taxable income of either entity. This creates a new audit risk: UAE groups that previously had no reason to document their intercompany pricing now need transfer pricing policies and documentation. The auditor should assess whether the group has adequate transfer pricing documentation and whether the intercompany prices used in the financial statements are consistent with that documentation. UAE groups commonly use service agent or sponsor arrangements for mainland entities where foreign ownership restrictions apply (though these have been relaxed significantly since 2020). The service agent or sponsor may receive a fee from the group entity, which is a related party transaction but not an intercompany transaction (the sponsor is not a group entity). However, if the group has structured the sponsorship through a group entity (for example, a UAE national shareholder entity that holds mainland shares on behalf of the foreign parent), the sponsorship fees may be intercompany transactions requiring elimination. The auditor must understand the legal structure and the economic substance of the sponsorship arrangement.

Common inspection findings

- The SCA identified instances where listed groups didn't include all controlled entities in their consolidation scope, particularly free zone entities and entities in other GCC countries that were treated as independent businesses despite common ownership and control.

Auditors of UAE groups sometimes didn't verify the completeness of intercompany transactions between mainland and free zone entities, relying on the client's reporting without reconciling to both entities' general ledgers.

With the introduction of corporate tax, audit inspections have identified groups that continued to operate without transfer pricing documentation for intercompany transactions, creating both tax risk and audit evidence gaps for the intercompany elimination work.

The DFSA's supervision of DIFC-regulated entities found cases where intragroup exposures between the regulated entity and other group members were not accurately reported in the prudential returns, suggesting that the intercompany data used for financial reporting consolidation may also be incomplete.

Auditors of UAE groups with subsidiaries in countries with limited banking infrastructure (parts of Africa, South Asia) sometimes didn't adequately address the difficulty of confirming intercompany balances with those subsidiaries, accepting unconfirmed balances without performing alternative procedures.