Table of Contents
Why Related-Party Transactions Are the Primary Audit Trigger
Under the UAE Corporate Tax regime, related-party transactions are the focal point of transfer pricing enforcement. While the arm’s length principle applies broadly, it is the volume, nature, and pricing of related-party dealings that most frequently prompt FTA scrutiny.
In practice, almost every significant transfer pricing adjustment arises from one of the following:
- Intragroup services or management fees
- Financing arrangements
- Intellectual property or royalty payments
- Shareholder or connected-person transactions
The UAE’s Corporate Tax Law does not treat related-party transactions as inherently abusive. However, it does treat them as inherently higher risk, requiring enhanced documentation, transparency, and commercial justification. For many UAE groups, particularly those with historically informal intercompany arrangements, this represents a fundamental shift in compliance expectations.
What Constitutes a Related-Party Transaction Under UAE Law
The UAE Corporate Tax Law adopts a broad and substance-driven definition of related parties and connected persons. These include, among others:
- Entities under common ownership or control
- Parent companies and subsidiaries
- Entities with significant influence over one another
- Shareholders, directors, and key management personnel (connected persons)
Importantly, the definition extends beyond corporate relationships to include individual shareholders and decision-makers, which is particularly relevant in family-owned and owner-managed UAE groups.
Transactions in Scope
A related-party transaction includes any transaction or arrangement between related parties or connected persons, regardless of whether it is:
- Cross-border or domestic
- Revenue-generating or cost-based
- Historically priced or newly implemented
This includes, but is not limited to:
- Management and support services
- Use or transfer of intellectual property
- Intercompany loans, guarantees, and cash pooling
- Cost-sharing and recharge arrangements
- Director remuneration and shareholder benefits
From an enforcement perspective, the FTA is less concerned with transaction labels and more concerned with economic substance and pricing outcomes.
Documentation Expectations for Related-Party Transactions
Beyond the Master File and Local File
While Master File and Local File documentation provide the overarching framework, related-party transactions require transaction-level support. In practice, the FTA expects taxpayers to maintain:
- Intercompany agreements aligned with actual conduct
- Clear descriptions of services or goods provided
- Evidence of benefit received (particularly for services)
- Benchmarking or pricing support
- Consistency between accounting, tax, and operational records
For connected-person transactions, additional scrutiny applies, particularly where remuneration or benefits are involved.
The Benefit Test: A Key Risk Area
One of the most common areas of challenge in the UAE relates to intragroup services. The FTA is expected to apply a benefit test consistent with OECD guidance, asking:
- Was a service provided?
- Did the UAE entity receive an economic or commercial benefit?
- Would an independent party have paid for the service?
Charges that are duplicative, shareholder-driven, or insufficiently evidenced are particularly vulnerable to disallowance.
High-Risk Related-Party Transactions in the UAE
Management Fees and Shared Services
Management fees are among the most frequently challenged transactions in transfer pricing audits. Common weaknesses include:
- Generic service descriptions
- Lack of contemporaneous evidence (e.g. emails, reports, KPIs)
- Cost allocations without allocation keys
- Mark-ups applied without benchmarking
In practice, historical acceptance of such charges is not a defence under the new regime.
Intragroup Financing and Guarantees
Financing arrangements attract heightened scrutiny, particularly where:
- Loans are advanced without credit analysis
- Interest rates are not benchmarked
- Guarantees are provided without fees
- Terms do not reflect the borrower’s creditworthiness
The FTA is expected to examine both pricing and risk assumption, not merely contractual terms.
Intellectual Property and Royalties
IP-related transactions are inherently high risk due to their impact on profit allocation. Key areas of focus include:
- Ownership versus development and control of IP
- Economic substance of IP-holding entities
- Royalty rates and base calculations
Groups with IP structures established before Corporate Tax must reassess whether profit attribution aligns with current substance.
Connected-Person Transactions
Payments to shareholders, directors, or related individuals must meet arm’s length remuneration standards. Excessive or undocumented payments may be:
- Partially or fully disallowed
- Recharacterized for tax purposes
This is particularly relevant for owner-managed businesses transitioning into the Corporate Tax regime.
FTA Audit Perspective: How Risks Materialise
From an audit standpoint, the FTA is expected to:
- Prioritise taxpayers with material related-party disclosures
- Cross-check disclosures against tax returns and financial statements
- Focus on outbound payments and loss-making UAE entities
In many cases, audits escalate not because pricing is clearly incorrect, but because documentation is insufficient to demonstrate arm’s length behaviour.
Consequences of Non-Compliance
Tax Adjustments and Penalties
Where related-party transactions are found not to be arm’s length, the FTA may:
- Adjust taxable income to arm’s length levels
- Apply Corporate Tax at the 9% rate on adjusted profits
- Impose administrative penalties for non-compliance or incorrect disclosures
For Free Zone entities, inappropriate related-party arrangements may also:
- Undermine Qualifying Free Zone Person status
- Trigger reassessment of income taxed at 0%
Governance and Reputational Impact
Beyond financial exposure, transfer pricing disputes often result in:
- Prolonged audits and information requests
- Increased scrutiny in subsequent years
- Internal governance and reporting challenges
These indirect costs are frequently underestimated.
Practical Risk Mitigation for UAE Groups
From a practical perspective, UAE groups should:
- Identify and map all related-party transactions
- Review pricing and documentation annually
- Align intercompany agreements with actual conduct
- Ensure consistency across tax, accounting, and operational data
Early identification and proactive documentation remain the most effective risk mitigation tools.
From Compliance to Defensibility: Managing Related-Party Risk in the UAE
Related-party transactions sit at the heart of the UAE’s transfer pricing framework. While they are a normal feature of group operations, they also represent the greatest source of tax risk under the Corporate Tax regime.
In the UAE, defensibility is driven not by intent, but by evidence, documentation, and alignment with economic substance. Groups that address related-party risks proactively will be far better positioned to manage audits, protect incentives, and operate with certainty.
