Intercompany Recharge

Groups often centralise services in one company, which then recharges the others for their share. An intercompany recharge allocates a cost or service from one group entity to another: a parent may employ IT staff and support several subsidiaries, or one subsidiary may lease office space used by another.

Each legal entity should record its own activity and obligations, even when common owners view the group as one business, and the recharge creates income or cost entries and a settlement balance between entities, subject to the accounting facts. First determine whether a real service or benefit was provided, because a central cost is not automatically chargeable merely because headquarters incurred it.

The group should identify the recipient, nature of work, period and evidence, such as support tickets, payroll allocations or usage records. A charge for shareholder-only activity may not be appropriate as a subsidiary service, and the relevant transfer-pricing guidance helps determine the treatment of each type of cost.

Next choose an allocation driver that reflects benefit or usage: software licences can be traced to user seats, while support costs may be split using help-desk activity or another reasoned basis, and headcount is convenient but may be unfair if one entity consumes most of the work. Document the selected driver, source data and frequency, then apply it consistently unless business circumstances change.

Do not claim that all equal-sized subsidiaries receive equal value without checking. In a simplified example, the group incurs $1 million of eligible IT costs and a subsidiary's justified share is 30%, so at cost its share is $300,000, and if a defensible 5% markup applies to that cost base the illustrative charge is $315,000.

The markup is not a universal UAE safe harbour, and tax treatment may depend on the type of service, functions, risks and current rules; the final amount should reconcile to underlying expenses, and the group should check documentation requirements and materiality with a tax adviser. The UAE Federal Tax Authority's transfer-pricing guide sets out the arm's-length principle for transactions involving related parties and connected persons, meaning a related-party price should reflect the applicable benchmark and circumstances rather than whichever figure makes one group's profit look best, so some services may be priced at cost under relevant rules while others require a supported markup.

The receiving company needs a valid record of the charge, not merely a journal posted centrally without agreement. A written services agreement can cover the work, price method, settlement, data handling and changes, and an invoice or debit note can identify the period and allocation.

Tax invoice requirements, VAT or other indirect tax, and cross-border withholding questions need jurisdiction-specific checks, because being in one group does not automatically make a transaction tax-free. Consolidated financial statements present the group as one economic entity, so internal income, expense and receivable-payable balances arising from a recharge generally have to be eliminated when preparing consolidated results under the applicable framework, although each legal company's separate accounts retain its own transactions.

If the parent recognises $315,000 of recharge revenue and a subsidiary recognises that expense, leaving both in consolidated turnover and cost would inflate activity without an external sale.