What is Transfer Pricing?
Transfer Pricing refers to pricing of transactions (goods, services, intangibles, loans, etc.) between Related Parties or Connected Persons. As per the FTA’s official Transfer Pricing Guide, these prices must reflect arm’s length conditions, i.e., the price that would have been charged between unrelated parties under similar circumstances.
Transfer Pricing is essential for both domestic and international transactions in the UAE. It helps ensure that multinational businesses operating in or through the UAE do not shift taxable profits away from the UAE by using artificial pricing between group companies.
Why Transfer Pricing Matters in UAE
The UAE introduced Corporate Tax Law (Federal Decree Law No. 47 of 2022) effective 1 June 2023. Transfer Pricing regulations (Articles 34–36) align UAE with OECD standards to prevent profit shifting and tax base erosion.
Key risks mitigated:
- Artificial shifting of profits to low-tax jurisdictions
- Underpayment of tax due to manipulated intra-group pricing
- Double taxation from non-compliance
💡 Transfer Pricing also plays a key role in determining whether a transaction affects the UAE tax base, especially when foreign operations are involved.
Who Must Comply?
All Taxable Persons including Free Zone Persons, with transactions involving Related Parties or Connected Persons are subject to Transfer Pricing rules.
Even if a company qualifies for 0% tax (e.g., a QFZP in a Free Zone), it must:
- Apply the Arm’s Length Principle
- Maintain documentation if thresholds are met
Thresholds for detailed documentation:
- Revenue > AED 200M, or
- Related Party transactions > AED 50M
Transfer Pricing obligations extend not only to direct intercompany transactions, but also to dealings involving permanent establishments, indirect control, and even third-party arrangements where influence may exist.
Related Parties & Connected Persons
🔹 Related Parties
Defined in Article 35(1) as:
- Entities under common ownership/control (≥50%)
- Natural persons related up to the 4th degree (including by marriage or adoption)
- Parent-subsidiary, sister companies, or PEs of the same legal entity
🔹 Connected Persons
Defined in Article 36(2):
- Shareholders, directors, officers
- Related persons of directors or shareholders
- Partners in unincorporated partnerships
OECD Guidelines & Arm’s Length Principle
🔸 Arm’s Length Principle (ALP)
All Controlled Transactions must be priced as if between independent entities.
Example:
- A UAE sawmill sells timber to its foreign affiliate at cost (AED 15,000)
- Market price is AED 20,000
- The group saves tax in the foreign low-tax country
- Adjustment required to bring pricing to market level
🔸 Comparability Analysis
Before applying pricing methods, conduct:
- Functional analysis (functions, assets, risks)
- Industry & economic context
- Transaction-specific terms
Transfer Pricing documentation in the UAE must consider local pricing benchmarks and economic factors to ensure alignment with real market behavior, not just international comparables.
Transfer Pricing Methods (as per OECD & UAE Law)
The UAE follows the 5 OECD-endorsed methods:
- Comparable Uncontrolled Price (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
Selection should be based on most appropriate method relevant to:
- Nature of transaction
- Availability of comparables
- Risk and functional profile
Taxable persons are required to select the most reliable method using a “best method” approach — assessing consistency, reliability, and relevance to their specific case.
Documentation Requirements
UAE adopts a 3-tiered approach:
- Transfer Pricing Disclosure Form (mandatory for all)
- Master File (required if revenue > AED 200M or transactions > AED 50M)
- Local File (same threshold as above)
Key aspects:
- Documentation must be contemporaneous
- Must be retained for 7 years
- FTA may request documents during audits
Even businesses not exceeding the thresholds are encouraged to perform risk assessments and maintain baseline TP analysis to ensure readiness in case of FTA inquiries.
Transfer Pricing Disclosure Form
Filed annually with Corporate Tax Return. It must include:
- Summary of Controlled Transactions
- Relationship details
- Transfer Pricing method used
Penalties for Non-Compliance
| Violation | Penalty Amount |
|---|---|
| Failure to file Disclosure Form | AED 10,000+ |
| Inaccurate documentation | AED 20,000+ |
| Adjustments by FTA | Higher tax liability |
| Repeated non-compliance | Legal consequences |
Penalties are expected to become stricter over time as enforcement matures and more businesses fall under the purview of Transfer Pricing regulations.
Special Scenarios
Covered in detail in the FTA Guide:
- Intra-group loans and cash pooling
- Royalty payments for intangibles
- Captive insurance
- Intra-group service charges
- Cost Contribution Arrangements (CCAs)
Substance Requirements & Transfer Pricing Nexus
🏢 Transfer Pricing compliance is closely linked to economic substance. Businesses must demonstrate that functions, assets, and risks (FAR analysis) are aligned with operational reality and not just contractual terms.
A lack of real activity or operational control in the UAE can undermine TP positions and trigger challenges from tax authorities.
⚠️ Ensure that operational activities support declared profit attribution.
How to Stay Compliant
✅ Identify Related Party/Connected Person transactions
✅ Conduct Functional & Risk Analysis
✅ Choose & apply best-fit pricing method
✅ Maintain disclosure, Master & Local File (if required)
✅ Assess economic substance alignment
✅ Consult a UAE-based Transfer Pricing Advisor
FAQ’s
Are Free Zone entities exempt from Transfer Pricing?
No. Arm’s Length Principle and disclosure still apply if transactions exist.
Is benchmarking mandatory?
Yes, especially for Local File analysis.
Are small businesses (<AED 3M revenue) subject to TP rules?
Yes, but Transfer Pricing documentation may not be required.
Do payments to directors count as related party transactions?
Yes, if they meet Connected Person definitions.
Do I need written intercompany agreements?
Highly recommended. If absent, actual conduct takes precedence.
Final Thoughts
The UAE’s Transfer Pricing regime is robust and aligned with global standards. Ignoring TP compliance can expose your business to:
- FTA scrutiny
- Hefty penalties
- Risk of profit adjustments
📞 Need help with Transfer Pricing in UAE?
Contact Prefect Advisors DMCC for audits, benchmarking, documentation, and returns.
