How Do Transfer Pricing Rules Work in the UAE and What Do They Require for Corporate Tax Filing?

What Transfer Pricing Is and Why It Matters for UAE Corporate Tax

Transfer pricing refers to the prices set for transactions between related parties: a parent company selling goods to a subsidiary, a group company providing services to an affiliate, a holding company lending funds to an operating entity, or a UAE business licensing intellectual property to a connected overseas company. These prices determine how much revenue and cost is allocated to each entity in the group, which directly affects the taxable income reported in each jurisdiction.

The UAE’s Corporate Tax Law under Federal Decree-Law No. 47 of 2022 requires that all transactions between related parties be conducted at arm’s length , at prices that would have been agreed between independent, unconnected parties dealing in similar circumstances. This is the arm’s length principle, which the UAE has adopted in alignment with the OECD Transfer Pricing Guidelines.

Transfer pricing matters for UAE Corporate Tax because the FTA has the authority to adjust the taxable income of a UAE entity where related-party transactions are not priced at arm’s length. Where the FTA determines that a UAE company has understated its income or overstated its deductions through non-arm’s length pricing, the adjustment increases taxable income and the resulting Corporate Tax liability, with additional penalties applying on top.

Who Is a Related Party Under UAE Corporate Tax Law?

The Corporate Tax Law and its associated Ministerial Decisions define related parties broadly. A person is a related party of a taxable person where:

• One person holds a direct or indirect ownership interest of 50% or more in the other, or controls it
• Both are under common ownership of 50% or more, or common control
• One is an individual and the other is a legal entity in which the individual, their spouse, or a relative within the fourth degree holds a direct or indirect interest of 50% or more
• The person is a partner in an unincorporated partnership with the taxable person
• The person is a director or officer of the taxable person, or a close relative of such a person

The 50% threshold is deliberately broad. It captures holding company structures, sister company arrangements, majority-owned joint ventures, and shareholder loan arrangements that smaller or family-owned businesses commonly enter into without considering the transfer pricing implications.

The Arm’s Length Methods

The OECD Transfer Pricing Guidelines, which the UAE’s framework is aligned with, recognise five methods for testing whether a related-party transaction is priced at arm’s length. The most appropriate method depends on the nature of the transaction, the availability of comparable data, and the functional profiles of the parties involved.

Comparable Uncontrolled Price (CUP)

The CUP method compares the price charged in a related-party transaction with the price charged in a comparable transaction between independent parties. It is the most direct method and is preferred where a truly comparable uncontrolled transaction exists. It works best for commodity transactions, standardised financial products, and similar homogeneous goods or services where market prices are observable.

Resale Price Method (RPM)

The RPM is used primarily for distribution transactions where a related party purchases goods and resells them to an unrelated customer. The arm’s length price is established by taking the resale price to the independent customer and deducting an appropriate gross margin that reflects the distributor’s functions, assets, and risks.

Cost Plus Method

The cost plus method is used for manufacturing, contract manufacturing, or service transactions. It starts with the cost of producing the goods or providing the service and adds an appropriate mark-up reflecting the functions performed and risks assumed. It is commonly used for intragroup service charges and contract manufacturers that perform routine functions.

Transactional Net Margin Method (TNMM)

The TNMM is the most widely used transfer pricing method in practice because it is flexible and robust. It examines the net profit margin that the tested party earns relative to an appropriate base , costs, sales, or assets , and compares this to the margins earned by comparable independent companies performing similar functions. TNMM is used where traditional transaction methods cannot be applied reliably due to limited comparable data or differences in the transacting parties’ functional profiles.

Profit Split Method

The profit split method is used for highly integrated transactions where both parties make unique and valuable contributions and it is not possible to evaluate the arm’s length pricing from the perspective of either party alone. It divides the combined profit from the transaction between the related parties in proportion to their relative contributions. It is most commonly applied to transactions involving unique intangibles, complex financial instruments, or highly integrated operations.

The Three Tiers of UAE Transfer Pricing Documentation

The UAE transfer pricing documentation framework is set out in Ministerial Decision No. 97 of 2023. It follows the OECD’s recommended three-tier approach, with specific thresholds determining which level of documentation each entity must prepare.

Tier 1: Transfer Pricing Disclosure Form

The Transfer Pricing Disclosure Form is submitted with the annual Corporate Tax return and summarises all related-party transactions undertaken during the tax period. All taxable persons with related-party transactions must submit this form with their return, regardless of transaction value. It requires disclosure of the nature of each transaction category, the amounts involved, the related party’s jurisdiction, and the transfer pricing method applied.

Omitting the Disclosure Form from the Corporate Tax return , or submitting an incomplete one , constitutes a compliance failure that can result in rejection of the return and penalties under Cabinet Decision No. 129 of 2025.

Tier 2: Local File

A Local File is required where the UAE entity’s aggregate related-party transactions during the tax period exceed AED 4 million. The Local File contains detailed documentation of each material category of related-party transaction, including a functional analysis of the entity’s functions performed, assets used, and risks assumed, the selection and application of the transfer pricing method used, and benchmarking analysis demonstrating that the transaction is priced at arm’s length.

The Local File must be prepared and available by the filing deadline for the Corporate Tax return. The FTA does not require it to be submitted with the return but can request it at any point, and its non-availability during an audit is treated as a documentation failure.

Tier 3: Master File

A Master File is required where the multinational group of which the UAE entity is a member has total consolidated group revenues of AED 3.15 billion or more in the preceding tax period. The Master File provides a high-level overview of the group’s global business operations, organisational structure, supply chain, intangibles, intercompany financing arrangements, and group-wide transfer pricing policies. It gives the FTA the context within which the UAE entity’s Local File transactions sit.

The Master File may be prepared at the group level and is typically the same document filed with all jurisdictions in which the group operates. Where the UAE entity does not itself prepare the Master File, it must obtain it from the group and make it available to the FTA on request.

Country-by-Country Report (CbCR)

The Country-by-Country Report is required where the ultimate parent entity of a multinational group is resident in the UAE and the group’s annual consolidated revenue meets or exceeds AED 3.15 billion. The CbCR provides jurisdiction-by-jurisdiction data on revenue, profits, taxes paid, employees, and assets across the entire group, enabling tax authorities to assess whether profit allocation across the group appears consistent with economic activity. The CbCR is filed separately from the Corporate Tax return through the FTA’s designated mechanism.

How Transfer Pricing Affects QFZP Status

Transfer pricing compliance has a specific and important implication for Qualifying Free Zone Persons. One of the 5 conditions that must be met to maintain QFZP status and access the 0% Corporate Tax rate on qualifying income is compliance with the transfer pricing provisions of the Corporate Tax Law. A QFZP that enters into related-party transactions without proper arm’s length pricing and documentation risks failing this condition, which triggers loss of QFZP status for that tax period and the following 4 periods.

The practical consequence is that transfer pricing errors are more costly for free zone businesses than for mainland businesses in the same position. A mainland business that has a transfer pricing adjustment faces additional Corporate Tax on the adjusted income. A QFZP that fails the transfer pricing condition loses its 0% rate on all qualifying income for 5 tax periods , a potentially far larger financial consequence depending on the scale of qualifying income involved.

The Most Common Transfer Pricing Issues for UAE Businesses

The following transaction types represent the highest-frequency transfer pricing issues for UAE businesses, and the areas where FTA scrutiny is most likely to be applied:

• Management fees and shared services: a parent company or group services company charging management fees to UAE subsidiaries. These fees are commonly challenged where the services cannot be specifically identified, the amounts are not benchmarked, or the benefit to the UAE entity is not documented
• Intercompany loans: shareholder loans to UAE entities, or loans between related group companies. The interest rate on such loans must reflect the arm’s length rate for a similar loan between independent parties with the same credit profile and terms. Zero-interest shareholder loans and below-market-rate financing are common areas of non-compliance
• Intellectual property royalties: payments from UAE entities to overseas related parties for the use of trademarks, patents, or software. These require specific benchmarking of the royalty rate against comparable licence arrangements between independent parties
• Purchase and sale of goods between related entities: particularly where the pricing affects how much profit is allocated to the UAE entity versus a lower-tax overseas affiliate
• Distribution arrangements: where a UAE entity acts as a limited-risk distributor for a related overseas manufacturer or principal, the distributor’s margin must reflect the limited functions and risks it assumes

Penalties for Transfer Pricing Non-Compliance in the UAE

The penalty consequences of transfer pricing non-compliance in the UAE fall into three categories:

• Documentation failures: failure to prepare and maintain the required Local File, Master File, or CbCR, or to submit the Transfer Pricing Disclosure Form with the return, attracts administrative penalties under the Corporate Tax penalty framework
• FTA adjustments: where the FTA determines that related-party transactions are not at arm’s length, it can adjust the taxable income of the UAE entity. The adjustment increases the taxable income figure, producing additional Corporate Tax on the adjusted amount plus late payment interest under Cabinet Decision No. 129 of 2025 (14% per annum)
• QFZP status consequences: as described above, a QFZP that fails the transfer pricing condition loses its 0% rate for 5 consecutive tax periods

What Good Transfer Pricing Documentation Looks Like

A Local File that satisfies the FTA’s requirements goes beyond a list of transactions. It demonstrates the following for each material transaction category:

• A functional analysis identifying what each party does (functions performed), what it owns (assets used), and what risks it assumes in the transaction
• The method selected to test arm’s length pricing, and why it is the most appropriate method for the specific transaction
• A benchmarking study identifying comparable transactions or companies from which an arm’s length range of prices or margins can be established
• Confirmation that the actual price or margin falls within the established arm’s length range
• Supporting documentation: contracts, invoices, payment records, and any internal pricing policies

Documentation prepared after an FTA audit has been notified is treated with considerably more scepticism than documentation prepared contemporaneously and available at the time of the audit. Preparing the Local File before the Corporate Tax return is filed , not after an enquiry is received , is both the regulatory requirement and the practical best practice.

Frequently Asked Questions (FAQs)

What is the arm’s length principle in UAE transfer pricing?

The arm’s length principle requires that transactions between related parties be priced as they would be between independent parties dealing under comparable circumstances. It is the foundational standard of UAE transfer pricing under Federal Decree-Law No. 47 of 2022 and is aligned with the OECD Transfer Pricing Guidelines.

Who must prepare a Local File in the UAE?

Any UAE taxable person whose aggregate related-party transactions in the tax period exceed AED 4 million must prepare a Local File. The threshold applies to the total of all related-party transactions, not any individual transaction category.

Who must file a Country-by-Country Report in the UAE?

The ultimate parent entity of a multinational group that is resident in the UAE and has annual consolidated group revenue of AED 3.15 billion or more must file a CbCR. The threshold is assessed at the group level, not the individual entity level.

Does transfer pricing apply to small UAE businesses?

The arm’s length principle applies to any UAE business with related-party transactions, regardless of size. The mandatory documentation obligations (Local File, Master File, CbCR) apply only above specified thresholds, but all businesses with related-party transactions must complete the Transfer Pricing Disclosure Form and price their related-party transactions at arm’s length.

What happens if the FTA adjusts transfer prices?

An FTA transfer pricing adjustment increases the taxable income of the UAE entity to reflect the arm’s length price. Additional Corporate Tax is assessed on the adjusted income, with late payment interest at 14% per annum under Cabinet Decision No. 129 of 2025 applying from the original filing deadline. Where the UAE entity is a QFZP, the adjustment may also trigger loss of QFZP status for 5 tax periods.

Must transfer pricing documentation be submitted with the Corporate Tax return?

The Transfer Pricing Disclosure Form must be submitted with the return. The Local File and Master File do not need to be submitted with the return but must be prepared and available by the filing deadline and provided to the FTA on request. The CbCR is filed through the FTA’s separate mechanism.

How Farahat & Co. Can Help

Farahat & Co. provides transfer pricing advisory and documentation services to UAE businesses across the full spectrum of compliance obligations: Transfer Pricing Disclosure Form preparation, Local File and Master File compilation, benchmarking studies, arm’s length analysis for intercompany loans and management fees, QFZP transfer pricing compliance review, and FTA audit support where transfer pricing positions are challenged.

Contact Farahat & Co. today to discuss your transfer pricing and Corporate Tax compliance requirements.