Table of Contents
Why Transfer Pricing Has Become a Board-Level Issue in the UAE
Transfer pricing has moved rapidly from a technical tax concept to a governance and risk issue that requires board-level awareness in the UAE. The introduction of Federal Decree-Law No. 47 of 2022 (UAE Corporate Tax Law) fundamentally changed how related-party transactions are viewed, documented, and scrutinised. For the first time, the UAE has embedded the arm’s length principle as a statutory requirement, supported by enforcement powers granted to the Federal Tax Authority.
Historically, many UAE groups both multinational and domestic, structured intercompany arrangements primarily around operational convenience, treasury efficiency, or regulatory considerations. Pricing was often driven by precedent rather than benchmarking, and documentation was minimal or prepared only for overseas tax authorities. That approach is no longer viable. The UAE has explicitly aligned its transfer pricing framework with the OECD Transfer Pricing Guidelines, as confirmed in the FTA’s Transfer Pricing Guide issued on 23 October 2023. This alignment signals a clear policy intent: profits must follow value creation, and pricing outcomes must be defensible on a standalone basis.
From a governance perspective, this has material implications. Transfer pricing now directly affects:
- Reported profitability of UAE entities
- Corporate tax liabilities at the 9% rate
- Free Zone tax incentives and Qualifying Free Zone Person status
- Audit exposure and dispute risk
In practice, transfer pricing failures rarely arise because a group misunderstood the law. They arise because pricing decisions were not documented, not reviewed, or not aligned with commercial reality. This is why transfer pricing is increasingly discussed not only by tax teams, but also by finance leadership and boards.
Scope of Application: Who Must Comply with UAE Transfer Pricing Rules
Entities Covered
UAE transfer pricing rules apply broadly and without carve-outs based on size or tax rate. The scope includes:
- UAE-resident juridical persons subject to Corporate Tax
- Non-resident persons with a UAE permanent establishment
- Free Zone Persons, including Qualifying Free Zone Persons, in respect of related-party and connected-person transactions
A critical point often misunderstood in the market is that Free Zone status does not exempt an entity from transfer pricing compliance. Even where income is taxed at 0%, arm’s length pricing and documentation obligations still apply. The FTA has made it clear that preferential tax treatment does not reduce the standard of scrutiny applied to related-party dealings.
From a practical perspective, this means Free Zone entities must be able to demonstrate that:
- Income allocated to the Free Zone reflects real functions, assets, and risks
- Charges to or from related parties are commercially justified
- Profit outcomes are consistent with the entity’s operational substance
Failure to do so can result not only in transfer pricing adjustments, but also in challenges to Qualifying Free Zone Person status, with potentially significant tax consequences.
Transactions in Scope
The UAE transfer pricing framework applies to a wide range of controlled transactions, including:
- Sale and purchase of goods
- Intragroup services and management fees
- Intragroup financing, including loans, guarantees, and cash pooling
- Intellectual property licensing and cost-sharing arrangements
- Business restructurings and transfers of functions or risks
Importantly, purely domestic transactions are not excluded. The FTA retains the power to adjust pricing even where both parties are UAE taxpayers, particularly where it identifies tax arbitrage, profit shifting, or erosion of the UAE tax base.
The Arm’s Length Principle: Practical Interpretation in the UAE Context
What “Arm’s Length” Means in Practice
The arm’s length principle requires that related parties transact as independent enterprises would under comparable circumstances. While conceptually straightforward, its application in the UAE presents specific challenges that many groups are only beginning to confront.
Common issues include:
- Limited availability of reliable local comparables in certain sectors
- Regional headquarters performing strategic oversight without historical benchmarking
- Shareholder-driven arrangements historically priced at cost or without consideration
Groups that rely heavily on historical pricing models or undocumented assumptions will find it increasingly difficult to defend outcomes under audit.
Accepted Transfer Pricing Methods
The UAE recognises all OECD-approved transfer pricing methods, including:
- Comparable Uncontrolled Price (CUP)
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method (TNMM)
- Transactional Profit Split Method
Taxpayers are required to apply the most appropriate method, based on the facts and circumstances of each transaction. In practice, FTA challenges often arise not because a method is technically invalid, but because method selection is not supported by a robust functional and comparability analysis.
Documentation Obligations: More Than a Compliance Formality
Transfer Pricing Disclosure Form
All UAE taxpayers engaging in related-party transactions must submit a Transfer Pricing Disclosure Form with their Corporate Tax return. This is not a high-level summary. It is a formal declaration that:
- Transactions have been priced at arm’s length
- Supporting documentation exists
- The taxpayer is prepared to substantiate its position if challenged
Inaccurate or incomplete disclosures materially increase audit risk and can undermine the credibility of the taxpayer’s broader compliance framework.
Master File and Local File Requirements
Certain taxpayers are required to prepare:
- A Master File, outlining the group’s global business, value chain, intangibles, and transfer pricing policies
- A Local File, focusing on UAE-specific transactions, benchmarking, and economic analysis
Preparation of both files is mandatory where:
- UAE revenue exceeds AED 200 million, or
- The Taxable Person is a Constituent Company of a Multinational Enterprises Group with consolidated group Revenue of AED 3.15 billion or more in the relevant Tax Period.
- UAE-only groups with no overseas entities are not expected to prepare a group-level Master File. Where the revenue thresholds are crossed, they should still prepare a Local File covering UAE related-party transactions.
- Businesses below the documentation thresholdsare not formally required toprepare Master File or Local File reports. However, they must keep basic and reasonable support to show that related-party and connected-person pricing reflects market conditions.
- Transfer pricing files are notsubmittedwith the tax return. They are kept on record and shared only if the FTA asks for them. Once requested, they must be provided within 30 days (or within any extended deadline approved by the FTA).
FTA Audit and Enforcement Perspective
Transfer Pricing as an Audit Priority
Globally, transfer pricing is the single largest source of tax disputes, and the UAE is aligning with this trend. The FTA has both the legislative authority and access to international best practices to challenge non-arm’s length outcomes.
Areas likely to attract scrutiny include:
- UAE entities reporting persistent or unexplained losses
- Significant outbound service fees, royalties, or interest payments
- Financing structures inconsistent with the entity’s credit profile
- Profit allocations that do not align with operational substance
In practice, the FTA is expected to cross-reference transfer pricing positions with:
- Financial statements
- VAT filings
- Transfer Pricing Disclosure Forms
Penalties and Adjustments
Where related-party or connected-person transactions are not priced in accordance with the arm’s length principle, the FTA is empowered to adjust taxable income to reflect arm’s length outcomes. Such adjustments may result in:
- Upward revisions to taxable income
- Additional Corporate Tax liabilities at the 9% rate on reallocated profits
- Administrative penalties under the UAE Corporate Tax administrative penalty framework
Failure to maintain or provide transfer pricing documentation within the statutory timeframe following an FTA request may trigger administrative penalties, including fixed penalties and additional monthly penalties for continued non-compliance. Inaccurate or incomplete transfer pricing disclosures may also result in further penalties where misstatements are identified.
For Free Zone entities, transfer pricing non-compliance may have broader consequences. Where related-party arrangements undermine arm’s length pricing or substance requirements, this may jeopardise Qualifying Free Zone Person status, potentially resulting in affected income being subject to Corporate Tax at the standard 9% rate.
Transfer Pricing as a Permanent Feature of UAE Tax Governance
The UAE’s transfer pricing framework is not a transitional measure; it is a permanent and central feature of the Corporate Tax regime. Groups that approach transfer pricing defensively, or treat it as a retrospective compliance exercise, will face increasing difficulty under audit.
By contrast, groups that embed transfer pricing into:
- Governance structures
- Financial controls
- Intercompany contracting and documentation
will be better positioned to operate with certainty and withstand regulatory scrutiny.
In the UAE, transfer pricing is no longer about correcting numbers after the fact. It is about demonstrating commercial reality, discipline, and accountability before the FTA asks the question.
