Transfer pricing assessment is a core part of corporate tax compliance in the United Arab Emirates, following the introduction of Federal Decree-Law No. 47 of 2022. It ensures that transactions between related parties are carried out at arm’s length, in line with international standards. This guide covers the requirements, the methods used, the documentation businesses need to keep, and the practical steps to stay compliant.
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Why Transfer Pricing Rules Exist
Consider a company with a manufacturing arm in the US and a distribution affiliate in the UAE. The US entity sells components to its UAE affiliate, which then distributes them locally. Because the UAE has no corporate tax on that income while the US charges a much higher rate, the group has an incentive to underprice that sale, shifting profit into the UAE and shrinking the taxable income reported in the US. Transfer pricing rules exist to stop related parties from using pricing like this to move profit out of where it was actually earned.
UAE Corporate Tax Regulations
Under Article 34 of the UAE Federal Decree-Law No. 47 of 2022, all transactions between related parties must comply with the arm’s length principle, preventing Base Erosion and Profit Shifting (BEPS) and keeping tax planning fair and transparent.
Under Article 35, related parties include natural persons connected within the fourth degree of kinship, and any person, whether an individual or a company, who directly or indirectly owns 50% or more of another entity or otherwise controls it. The rules draw on the OECD Transfer Pricing Guidelines to determine arm’s length prices for these transactions.
The regime also includes a safe harbour rule: where a related-party transaction meets certain conditions, it can be treated as arm’s length without further adjustment by the FTA, giving businesses more certainty and predictability.
Transfer Pricing Methods
Several recognized methods are used to determine arm’s length prices:
- Comparable Uncontrolled Price (CUP) method: compares the price charged in a controlled transaction with the price charged for similar goods or services in a comparable uncontrolled transaction.
- Cost Plus Method (CPM): adds a standard markup to the supplier’s costs in a controlled transaction to arrive at an arm’s length price.
- Resale Price Method (RPM): subtracts a markup from the resale price of goods or services in a controlled transaction to arrive at an arm’s length price.
- Transactional Net Margin Method (TNMM): compares the net profit margin earned in a controlled transaction with the margin earned by unrelated parties in comparable transactions.
- Profit Split Method: allocates the combined profits or losses of related parties based on their respective contributions to the value chain.
Connected Persons
Payments or benefits given to a connected person, such as an owner, director, or officer, are only deductible if the business can show they reflect market value and were incurred wholly and exclusively for business purposes. Payments that fail either test can be disallowed as a deduction.
Transfer Pricing Documentation
Documentation is how a business demonstrates that its related-party transactions genuinely reflect arm’s length pricing. It typically includes a Master File, covering the group’s global operations and transfer pricing policies, and a Local File, covering the UAE entity’s specific transactions and pricing.
A Master File and Local File are required only if the UAE entity’s own revenue reaches AED 200 million or more in the tax period, or if its group’s consolidated revenue reaches AED 3.15 billion or more. Businesses below both thresholds still need to price related-party transactions at arm’s length, but formal documentation isn’t mandatory.
Two further disclosure thresholds apply on the corporate tax return itself:
- A Related Party Schedule is required once related-party transactions exceed AED 40 million in total value, or AED 4 million for a single category of transaction.
- A Connected Persons Schedule is required once payments to connected persons exceed AED 500,000.
Cross-Border Transactions and Intellectual Property
Cross-border transactions and intellectual property transfers get particular attention under transfer pricing rules. A few points matter here specifically:
- The UAE’s double tax treaties can affect how cross-border related-party transactions are assessed.
- UAE transfer pricing rules specifically address the transfer of intellectual property between related parties.
- The UAE has adopted the OECD’s BEPS Action 8-10 guidelines, which cover the transfer pricing of intangibles.
UAE Transfer Pricing Compliance Checklist
- Map all intra-group transactions: goods, services, intangibles, and loans.
- Apply an OECD-approved method to set and support arm’s length prices.
- Prepare and maintain a Master File and Local File if you’re above the AED 200 million or AED 3.15 billion threshold.
- Disclose related-party and connected-person transactions on your corporate tax return once you cross the relevant threshold.
- Run a benchmark analysis to justify your pricing decisions.
- Review pricing agreements annually to stay aligned with OECD standards and any updated FTA guidance.
Case Study: Manufacturing Group in Dubai
Challenge: a UAE subsidiary imported raw materials from its parent company in Germany at inflated prices, risking an FTA audit.
Action: the group ran a benchmark analysis using the TNMM method and adjusted pricing to align with market rates.
Outcome: the group avoided penalties and stayed compliant with FTA requirements.
What Non-Compliance Actually Costs
Failing to keep required records, including transfer pricing documentation, carries a fixed penalty of AED 10,000 for a first violation and AED 20,000 for a repeat violation within 24 months, under Cabinet Decision No. 75 of 2023.
The bigger exposure comes if the FTA actually adjusts your pricing after an audit. It recalculates your taxable income, applies the 9% tax on the difference, adds a 15% penalty on the underpaid tax, and charges 14% annual interest from when the tax should have been paid. On a AED 5 million adjustment, that adds up to close to AED 600,000 in total exposure.
FAQs
What is the arm's length principle in transfer pricing?
Who counts as a related party under UAE corporate tax?
Do all businesses need to prepare transfer pricing documentation?
What thresholds trigger disclosure on the corporate tax return?
What penalties apply for non-compliance?
Are loans between related parties subject to transfer pricing rules?
Work With a Transfer Pricing Specialist
Getting transfer pricing right protects your business from FTA adjustments, penalties, and avoidable disputes. Our Transfer Pricing Benchmarking service helps you set defensible arm’s length prices, prepare Master File and Local File documentation, and stay ready for FTA review. Contact us to get started.
