Key Insights into UAE Transfer Pricing Framework

Introduction:

Transfer Pricing (TP) is a fundamental concept in international taxation that refers to the rules and methods for pricing transactions within and between related parties. Because of its significant impact on corporate tax liabilities, transfer pricing ensures that the price of a transaction between related parties is not influenced by the relationship between them. This encompasses goods, services, financial transactions, and intangibles.

In the UAE, the scope of Transfer Pricing rules extends beyond transactions between Related Parties and includes dealings with Connected Persons.

The Transfer pricing framework is governed by the OECD Transfer Pricing guidelines (The 2022 Version), Article 9 (Associated enterprises) of the OECD Model Tax Convention, BEPS Actions 8 & 9 & 10 & 13, UAE Transfer Pricing guide (CTGTP1) and Articles 34 & 35 & 36 & 55 of the UAE Corporate Tax Law. The UAE transfer pricing rules are intended to be aligned with the OECD and its BEPS Project.

Arm’s Length Principle (ALP):

The Arm’s Length Principle (ALP) is a fundamental concept in transfer pricing. It ensures that the terms and conditions of transactions between related parties (often referred to as “controlled transactions”) should be consistent with those that would have been negotiated between independent parties under similar circumstances (referred to as “uncontrolled transactions”). Such a comparison of the Controlled Transaction with Comparable Uncontrolled Transactions is called a “comparability analysis” and is at the heart of the application of the Arm’s Length Principle.

While applying the Arm’s Length Principle (ALP) to intra-group transactions might not impact the group’s overall profits, it is essential for preventing profit shifting and tax avoidance. Specifically, transactions and arrangements between entities within the same group can be manipulated to move profits from entities in high-tax jurisdictions to those in lower-tax jurisdictions or from the UAE mainland to the free zone entities (benefiting from 0% Corporate Tax). This can significantly reduce the overall tax liability of the group. By ensuring that transactions between group entities are conducted at arm’s length, each jurisdiction receives a fair share of tax revenues based on the economic activities and value creation that occur within its boundaries.

It is important to note that the absence of a formal pricing arrangement or legal agreement between the transacting Related Parties or Connected Persons does not mean that such transactions are not subject to TP and ALP.

Related Parties:

In the UAE, taxpayers need to identify Related Parties based on connections through ownership, control, or family ties, as specified in Article 35 of the UAE Corporate Tax Law and the detailed UAE Transfer Pricing Guideline. This definition differs from the one used in IAS 24, which focuses on Related Party Disclosures. Therefore, UAE taxpayers must perform their analysis to determine Related Parties according to UAE TP Articles rather than relying on financial disclosures or global Transfer Pricing definitions.

Article 35 of the UAE Corporate Tax Law defines Related Parties as:

• Natural persons related within the fourth degree of kinship or affiliation, including adoption or guardianship.
• A natural person and a juridical person where the natural person, alone or with related parties, owns 50% or more of the juridical person, or directly or indirectly controls it.
• Two or more juridical persons where one owns 50% or more of the other, directly or indirectly controls it, or any person owns 50% or more or controls two or more juridical persons.
• A person and its Permanent establishment.
• Partners in the same unincorporated partnership.
• A trustee, founder, settlor or beneficiary or a trust of foundation, including the trust or foundation’s related parties.

Paragraph 2 of Article 35 defines control as the ability of a person to:

• Exercise 50% or more voting rights.
• Determine the composition of 50% or more of the board of directors.
• Receive 50% or more of profits.
• Exercise significant influence over the conduct/affairs of another person.

Note: The FTA’s Corporate Tax Public Clarification (CTP002) specifies that entities owned or controlled by the UAE federal or local government are not automatically considered Related Parties under Article 35 of the UAE Corporate Tax Law. This clarification reduces the need for detailed analysis and documentation of transactions between such government-controlled entities.

Connected Persons:

Deductible payments or benefits from a Taxable Person to Connected Persons must be based on arm’s length price (Market Value), otherwise, a CT deduction will be denied for non-arm’s length payments.

Article 36 of the UAE Corporate Tax Law defines Connected Persons as:

• A natural person with direct or indirect ownership or control of the Taxable Person.

(For example, the individual owner of a limited liability company)

• A director or officer of the Taxable Person.

(For example, a Managing Director of a limited liability company)

• An individual related to the owner or director/officer of the Taxable Person.

(for example, a son of the owner of a limited liability company)

• Any partner in an unincorporated partnership.
• A Related Party to any of the above.

Note: Taxable Persons listed on a recognized stock exchange or regulated by a competent UAE authority are exempt from adhering to the Connected Person rules.

Transfer Pricing Methods:

To reach the Arm’s Length Price, selecting an appropriate TP method is essential to ensure that related parties or connected person transactions reflect the Arm’s Length Price. These methods apply the findings from the comparability analysis to evaluate the transfer prices or profits of the Related Parties or Connected Persons involved in a Controlled Transaction against the prices or profits of independent parties in Comparable Uncontrolled Transactions.

The OECD Transfer Pricing Guidelines (Chapter II) emphasise selecting the most appropriate transfer pricing method based on each case’s specific facts and circumstances, assessing comparability factors and each method’s relative strengths and weaknesses. Paragraph 2.2 of the guidelines suggests that the choice of method should aim to estimate closely the price that independent parties would set in comparable transactions under similar circumstances.

There are five internationally accepted Transfer Pricing methods detailed in the OECD Transfer Pricing Guidelines and internalised under Article 34(3) of the Corporate Tax Law.

Comparable Uncontrolled Price Method (CUP):

The CUP method directly compares the prices in a controlled transaction with those in a similar uncontrolled transaction under comparable conditions, making it a highly direct and reliable approach to applying the arm’s length principle (ALP). The similarity of the products or services involved is critical when using the CUP method. This method is particularly effective for commodities and financial transactions due to its straightforward comparability.

Where the CUP method is applied, the Controlled Transaction may be compared to an internal comparable (between the entity and third party) or an external comparable (between two unrelated parties)

Resale Price Method (RPM):

The RPM method calculates the arm’s length price of a product initially bought from a related party and then resold to an independent party. The method adjusts the resale price by deducting the “Resale Price Margin” and any additional transaction costs. This margin covers the reseller’s selling and operational expenses and allows for a profit that reflects the functions performed, assets utilized, and risks assumed. This provides a fair transfer price for the original transaction between the related parties.

RPM is particularly beneficial for entities involved in marketing and distribution activities. Maintaining consistent accounting practices is crucial when applying this method.

Cost Plus Method (CPM):

The CPM method calculates an arm’s length price by adding a suitable mark-up to the direct and indirect costs incurred by a supplier in a controlled transaction. This mark-up reflects the functions performed, risks assumed, assets used and market conditions. Primarily applicable in transactions involving semi-finished goods, joint facility agreements, long-term supply arrangements, or services, the CPM ensures the price is aligned with what would be expected between unrelated parties under similar circumstances.

The Transactional Net Margin Method (TNMM):

The TNMM method examines the net profit margin (NPM) relative to a specific base (such as costs, sales, or assets) by comparing the NPM from a controlled transaction with that of a similar uncontrolled transaction. This comparison can be made against the company’s own transactions (internal comparable) or against those of an independent enterprise (external comparable).

TNMM is particularly effective when individual products or services cannot be distinctly priced, as it focuses on overall profitability rather than transaction-specific details, making it less sensitive to variations between transactions than methods like the CUP method.

Profit Split Method (PSM):

The PSM method looks at the overall profit generated by multinational enterprise (MNE) operations and allocates it among the involved parties according to their respective contributions, assessed on an economically valid basis. PSM is particularly effective in situations involving highly integrated operations or unique contributions that are difficult to benchmark. The aim is to distribute profits in a manner that independent parties would have agreed to under similar circumstances.

Other Transfer Pricing methods:

Article 34(4) of the Corporate Tax Law allows for the use of alternative transfer pricing methods beyond the five standard ones if they cannot be reasonably applied, as long as these alternatives adhere to the Arm’s Length Principle. When using a non-standard method, it is required to provide thorough documentation that explains the choice of method and includes a robust economic and commercial rationale. Additionally, clear disclosures of the empirical analysis used in the method’s application must be included.

Transfer Pricing Database (Comparable Data):

Taxable Persons are encouraged to prioritize domestic comparables in their transfer pricing comparability analysis due to their closer alignment with local market and economic conditions. If domestic data is insufficient, they may expand their search to include regional or global comparables. The Federal Tax Authority (FTA) does not endorse specific commercial databases for finding comparables; however, it requires that the sources be reliable and that comparables be used in a geographical sequence: first local, then regional (Middle East), and finally, from other regions.

Transfer Pricing Considerations for Tax Group:

Within a Tax Group under UAE Corporate Tax, all group members are considered as a single taxable entity. This collective treatment negates the necessity of profit allocation among them for Corporate Tax considerations, thereby streamlining compliance efforts. It enables the preparation of consolidated accounts and obviates the need for documenting intra-group transactions.

Nevertheless, adherence to the Arm’s Length Principle (ALP) is mandated in specific situations as delineated in Ministerial Decision No. 301. These scenarios include:

• When a member has unutilized tax losses before joining the group.
• For transactions that qualify for certain tax incentives.
• When a new member joins an existing group that has already unutilized tax losses.
• For unutilized carried forward pre-grouping net interest expenditure.

Transfer Pricing Documentation:  

Article 55 of the UAE Corporate Tax Law sets out the transfer pricing documentation requirements for Taxable Persons whose financial year starts on or after June 1, 2023. These requirements include the preparation of a Master File, a Local File, a Disclosure Form, and, where applicable, a Country-by-Country Report (CBCR).

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UAE Transfer Pricing Compliance for Qualifying Free Zone Entities (QFZPs):

Qualifying Free Zone businesses in the UAE are required to comply with Transfer Pricing (TP) regulations by applying the arm’s length principle to all related-party transactions, just like other taxable entities. This ensures that profits are appropriately allocated and not artificially shifted between group companies.

To qualify for the 0% Corporate Tax rate, a QFZP must demonstrate adequate economic substance and ensure that its functional profile is consistent with its declared activities.

Additionally, each QFZP that meets the applicable TP compliance thresholds must prepare and maintain separate TP documentation to support its transfer pricing positions.

How Are Taxpayers Preparing for Transfer Pricing (TP) Compliance in the UAE?

1- Identification and Mapping of Related Parties and Connected Persons Transactions:

Taxpayers are proactively identifying Related Parties and Connected Persons as defined under UAE Corporate Tax Law. This includes mapping out all domestic and cross-border transactions with such parties, ensuring no arrangement or transaction is overlooked.

2- Establishing Transfer Pricing Policies:

Companies are formulating or revisiting their TP policies to align with the arm’s length principle, UAE and OECD guidelines. These policies serve as a foundation for consistent pricing of intercompany transactions.

3- Performing Year-End TP Adjustments (If Necessary)

Businesses are assessing their intercompany transactions during the year and making TP adjustments, if required, before closing the financial year to ensure alignment with the arm’s length standard.

4- Ongoing Monitoring of Related Parties and Connected Persons Transactions:

A continuous process is being put in place to track, review, and document related party transactions to avoid non-compliance or missed disclosures. This often involves collaboration between tax, finance, and legal teams.

5- Preparation of Transfer Pricing Documentation:

For taxpayers exceeding the TP documentation thresholds, comprehensive TP documentation—Local File, Master File and CBCR—is being prepared in advance to meet potential FTA inquiries or audits.

6- Staying Updated with Regulatory Changes:

Given the evolving nature of UAE tax regulations, businesses are actively monitoring guidance and updates issued by the FTA to ensure timely adaptation to any changes in TP rules.

7- Implementing Internal Controls and Systems:

Companies are investing in ERP systems and internal control mechanisms to automate the identification and tagging of related party transactions, improving traceability and audit readiness.

Conclusion:

Transfer Pricing has become a core component of corporate tax compliance in the UAE. With the introduction of the Corporate Tax regime, businesses—especially those engaged in cross-border or intra-group transactions—must prioritize aligning their operations with the Arm’s Length Principle.

Failure to identify Related Parties or Connected Persons, improperly priced transactions, or a lack of documentation can expose businesses to tax adjustments, penalties, and increased scrutiny from the FTA.

As the regulatory environment continues to evolve, proactive compliance through proper transfer pricing policies, documentation, and internal controls is not only essential for minimizing tax risks but also for enhancing transparency and long-term business resilience.

In short: Transfer Pricing isn’t just about taxes—it’s about sustainable and compliant business practices in the UAE’s new tax era.

Disclaimer: This publication is for informational purposes only and should not be considered professional or legal advice. While we strive for accuracy, we make no guarantees regarding completeness or applicability. mazeed, its members, employees, and agents do not accept or assume any liability, responsibility, or duty of care for any actions taken or decisions made based on this content. For official tax guidance, please refer to the UAE Ministry of Finance and the Federal Tax Authority.