What Is Transfer Pricing and Why Does It Matter in the UAE?

Transfer pricing refers to the prices charged between related parties — such as a parent company and its subsidiary — for the supply of goods, services, financing, or intellectual property. Without rules, these prices could be set artificially low or high to shift taxable profits to lower-tax jurisdictions.

Under the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022) and the Transfer Pricing Guide issued by the FTA, all transactions between Related Parties must comply with the Arm's Length Principle: prices must reflect what independent parties would agree to in comparable circumstances.

Who Is a "Related Party" Under UAE Law?

The definition is broad. Related parties include:

  • Any individual or entity with a 50% or more ownership or control link (direct or indirect)
  • A natural person and their spouse, parent, child, grandparent, grandchild, or sibling
  • Partners in an unincorporated partnership
  • Entities under common control — even if there is no direct ownership between them
  • Any person who controls a company — including by voting rights, board appointment power, or economic interest

Key point: The 50% threshold applies across any combination of direct and indirect interests. A company where your holding company owns 30% and you personally own 25% qualifies as a related party.

Which Transactions Must Be at Arm's Length?

All "Controlled Transactions" between related parties are covered, including:

  • Sale or purchase of goods
  • Provision of services (management fees, shared services, IT, HR)
  • Financing and interest on intra-group loans
  • Licensing or use of intellectual property
  • Rental of assets or property
  • Guarantees and financial support
  • Cost contribution arrangements

The 5 Transfer Pricing Methods

The FTA accepts the five OECD-approved methods. You must select the most appropriate method for the type of transaction:

  1. Comparable Uncontrolled Price (CUP) — compare the price to a transaction between independent parties for the same goods or services
  2. Resale Price Method (RPM) — work back from the resale price to a third party, deducting an arm's length gross margin
  3. Cost Plus Method (CPM) — mark up the supplier's costs by an arm's length gross margin
  4. Transactional Net Margin Method (TNMM) — compare the net profit margin to that of comparable independent companies (most commonly used)
  5. Profit Split Method (PSM) — split combined profits based on each party's relative contribution (used for highly integrated transactions)

Documentation Requirements

UAE transfer pricing documentation follows the OECD's three-tier structure:

1. Master File

A high-level overview of the multinational group: organisational structure, business activities, intangibles, financing, and group-wide transfer pricing policies. Required if the group has revenues exceeding AED 3.15 billion.

2. Local File

Detailed documentation of each material related-party transaction for the UAE entity. Required if the UAE taxable person's revenue exceeds AED 200 million in the tax period.

3. Country-by-Country Report (CbCR)

A breakdown of revenue, profits, taxes paid, employees, and assets across all jurisdictions in the group. Required if the group's consolidated revenue exceeds AED 3.15 billion.

Important: Even businesses below the documentation thresholds must apply the arm's length principle and disclose related-party transactions in their corporate tax return via a Disclosure Form. The Disclosure Form is mandatory for all taxable persons with related-party or connected-person transactions.

Penalties for Non-Compliance

  • Failure to submit a Disclosure Form: AED 100,000
  • Failure to maintain required transfer pricing documentation: AED 100,000 – AED 500,000 depending on the infraction
  • Underreported taxable income as a result of non-arm's length pricing: FTA may adjust income upward and charge the resulting corporate tax plus late payment penalties
  • Inaccurate information in the CbCR: AED 1,000,000

Practical Steps for UAE Businesses

  • ✓ Map all transactions with related parties for each financial year
  • ✓ Determine which transactions are material and require a formal arm's length analysis
  • ✓ Select and document the most appropriate transfer pricing method for each transaction type
  • ✓ Prepare or commission a benchmarking study using comparable independent companies (databases such as Orbis are commonly used)
  • ✓ Ensure intra-group agreements (loan agreements, service agreements, IP licences) exist and are in writing with arm's length terms
  • ✓ File the Disclosure Form with the corporate tax return — even if full documentation is not required
  • ✓ Retain all documentation for a minimum of 7 years (UAE corporate tax records retention period)

Free zone entities: Qualifying Free Zone Persons can still benefit from the 0% rate on Qualifying Income, but related-party transactions must still satisfy the arm's length principle. Failure to do so can jeopardise QFZP status.