Introduction
Transfer pricing was once a topic that only concerned large multinational groups. Under the UAE Corporate Tax regime, that is no longer the case. Any UAE business that transacts with related parties, whether that is a parent company abroad, a sister entity in another free zone, or even a shareholder drawing a management fee, now falls within the scope of transfer pricing rules to some degree. This guide explains what transfer pricing means in the UAE context, who needs formal documentation, and how to stay compliant. Our corporate tax consultants work with group structures of every size to get this right.
What Is Transfer Pricing?
Transfer pricing refers to the rules governing how transactions between related parties are priced for tax purposes. The core principle, known as the arm’s length standard, requires that transactions between connected companies or individuals be priced as though the parties were unrelated and dealing with each other on ordinary commercial terms.
Without this rule, group companies could shift profits between entities simply by adjusting internal prices, moving taxable income into whichever jurisdiction offered the most favourable tax treatment. The UAE Corporate Tax Law, aligned closely with OECD transfer pricing guidelines, closes that gap by requiring related party transactions to reflect genuine market pricing.
Who Is Considered a Related Party?
Under UAE Corporate Tax Law, related parties include:
- Two or more juridical persons where one owns 50 percent or more of the other, directly or indirectly
- Two or more juridical persons under common ownership or control of 50 percent or more
- An individual and a juridical person where that individual, alone or with related individuals, owns 50 percent or more of the entity
- Persons connected through family relationships, partnership arrangements, or other forms of control
Connected Persons rules operate alongside related party rules and specifically govern payments and benefits made to owners, directors, and other individuals connected to the business, such as salaries, rent, or other transfers of value.
What Transactions Are Covered?
- Transfer pricing rules apply to a broad range of intercompany dealings, including:
- Sale and purchase of goods between group entities
- Provision of services, including management fees, shared services, and consulting arrangements
- Licensing of intellectual property and royalty payments
- Intercompany loans and financing arrangements, including interest rates charged
- Cost sharing agreements across group entities
- Payments to connected individuals for services rendered to the business
The Master File and Local File: Who Needs Them?
The UAE requires certain businesses to maintain two specific documents to evidence transfer pricing compliance:
Master File
The Master File provides a high-level overview of the multinational group’s global business operations, organisational structure, and overall transfer pricing policies. It is generally required for businesses that are part of a multinational enterprise group with consolidated group revenue above a threshold set by the Ministry of Finance, currently AED 3.15 billion.
Local File
The Local File provides detailed information specific to the UAE entity’s related party transactions, including a functional analysis of the business and the transfer pricing method applied to each category of transaction. Local File requirements can apply at a lower threshold than the Master File, meaning a UAE entity that is part of a smaller group may still need to prepare one if its related party transactions exceed the applicable thresholds.
Do Smaller Businesses Need to Worry About Transfer Pricing?
Even businesses below the Master File and Local File thresholds are not exempt from the underlying arm’s length requirement. Every UAE taxpayer with related party transactions must still be able to demonstrate, if asked by the Federal Tax Authority, that those transactions were priced on an arm’s length basis. This means maintaining basic supporting evidence, such as comparable market pricing, intercompany agreements, and a clear rationale for the pricing applied, even where full Master File and Local File documentation is not formally required.
In practice, this affects a wide range of UAE SMEs with straightforward group structures, including businesses that charge management fees to a related entity, pay rent to a shareholder-owned property company, or receive interest-free or below-market loans from a parent company.
Choosing a Transfer Pricing Method
- The UAE Corporate Tax Law recognises several accepted methods for establishing arm’s length pricing, broadly aligned with OECD guidance:
- Comparable Uncontrolled Price method, comparing the price charged to prices used in similar transactions between unrelated parties
- Resale Price method, working backward from the resale price to an unrelated party
- Cost Plus method, applying an appropriate margin to the cost of providing goods or services
- Transactional Net Margin method, comparing net profit margins earned on related party transactions to those earned in comparable independent transactions
- Profit Split method, used where transactions are so interrelated that they cannot be evaluated on a separate basis
Selecting the appropriate method depends on the nature of the transaction, the availability of comparable data, and the specific facts of the business. This is an area where professional judgement matters considerably, and where the FTA expects a documented, defensible rationale rather than an arbitrary choice.
Penalties for Transfer Pricing Non-Compliance
Failure to maintain required transfer pricing documentation, or failure to provide it within the timeframe requested by the FTA, can result in administrative penalties. Beyond direct penalties, a lack of proper documentation also significantly weakens a business’s position if the FTA challenges the pricing of a related party transaction, potentially resulting in an adjustment to taxable income and additional tax due.
How Kaizen Can Help
Our tax consultancy firm Dubai businesses turn to for transfer pricing support helps groups of every size assess their related party exposure, determine whether Master File or Local File obligations apply, and prepare the documentation needed to support their pricing positions. Where a group also needs help structuring new related entities, our Company Formation Consultants in Dubai team works alongside our tax specialists to keep new structures compliant from the outset.
Speak to Kaizen about assessing your related party transactions and transfer pricing documentation needs.
