With the implementation of Corporate Tax in the United Arab Emirates (UAE) from June 1, 2023, transfer pricing has become a vital component of tax compliance for businesses involved in related-party transactions. As part of its alignment with the OECD Base Erosion and Profit Shifting (BEPS) framework, the UAE introduced robust Transfer Pricing (TP) regulations to ensure that intercompany transactions reflect market-based pricing and are not used to shift profits artificially. This blog offers a comprehensive introduction to transfer pricing in the UAE, covering key concepts, legal requirements, and compliance obligations for businesses.
1. What is Transfer Pricing?
Transfer pricing refers to the pricing of goods, services, intangible assets, or financial arrangements between related entities within a multinational group. For tax purposes, these transactions must be conducted at “arm’s length”—that is, the price should be similar to what independent parties would charge in a comparable transaction under similar circumstances.
Improper transfer pricing can result in base erosion and profit shifting, where profits are moved from high-tax jurisdictions to low- or no-tax jurisdictions, eroding a country’s tax base. The UAE’s transfer pricing rules aim to prevent such practices and ensure transparency and fairness.
2. Applicability of Transfer Pricing in the UAE
Transfer pricing regulations apply to UAE businesses that are part of a multinational enterprise (MNE) group or engage in transactions with related parties or connected persons. This includes:
- Subsidiaries and branches of foreign entities
- Entities owned or controlled by the same shareholders
- Transactions involving family-owned business groups
- Transactions between domestic group companies
Even if both parties are UAE residents, transfer pricing rules still apply where there is a possibility of tax base manipulation or preferential tax treatment (e.g., free zone vs. mainland entities).
3. The Arm’s Length Principle
At the heart of transfer pricing is the Arm’s Length Principle (ALP). This principle requires that related-party transactions be priced the same as if they had occurred between unrelated parties. The UAE follows OECD guidelines in enforcing the ALP.
To apply this principle, businesses must perform comparability analysis and choose a suitable transfer pricing method. The commonly accepted methods include:
- Comparable Uncontrolled Price (CUP) method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method (TNMM)
- Profit Split Method
4. Documentation Requirements
Businesses subject to UAE Corporate Tax must maintain appropriate transfer pricing documentation, especially if their revenue exceeds a specified threshold (expected to align with OECD thresholds of AED 200 million for Master File and AED 100 million for Local File). Key documentation includes:
- Master File: A global overview of the MNE group, including structure, financials, and intangible assets.
- Local File: Detailed documentation of intercompany transactions of the UAE entity, including financial analysis and benchmarking studies.
- Disclosure Form: Annual submission of a transfer pricing disclosure with the corporate tax return.
5. Common Types of Related-Party Transactions
In the UAE business environment, common related-party transactions that fall under TP rules include:
- Intercompany loans and financing arrangements
- Provision of management or back-office services
- Royalty payments for brand or intellectual property
- Shared service agreements (HR, IT, etc.)
- Sale of goods between affiliated entities
Each of these must be reviewed to ensure pricing is in line with arm’s length standards and properly documented.
6. Role of PEAK Business Consultancy Services
Navigating transfer pricing regulations requires in-depth expertise, especially when it comes to compliance, documentation, and risk management. PEAK Business Consultancy Services is a leading UAE-based VAT and Corporate Tax consultancy that assists businesses in implementing compliant and strategic transfer pricing policies.
From preparing Master and Local Files to designing intercompany pricing structures and defending against audits, PEAK BCS provides comprehensive TP advisory tailored to your business needs.
Visit https://www.peakbcs.com/ to explore their services or book a transfer pricing consultation today.
7. Transfer Pricing and Free Zones
Many businesses operating in UAE Free Zones believe they are exempt from transfer pricing rules. However, if such entities engage in transactions with mainland companies or are part of a multinational group, TP regulations still apply—especially if they seek to benefit from 0% tax rates on qualifying income.
In such cases, the FTA may closely examine whether the Free Zone entity is artificially shifting profits to avoid tax, making compliance and documentation even more crucial.
8. Penalties for Non-Compliance
Failure to comply with transfer pricing obligations can result in significant penalties, adjustments to taxable income, and denial of deductions. Potential consequences include:
- Administrative fines for non-submission or incorrect disclosure
- Additional tax liability due to TP adjustments
- Interest and penalties for underpaid tax
- Reputational damage and increased audit risk
Proactive compliance and expert support can help mitigate these risks and ensure readiness for future tax authority reviews.
9. PEAK BCS: Your Transfer Pricing Partner
PEAK Business Consultancy Services offers end-to-end transfer pricing services, including:
- TP risk assessments and planning
- Preparation of Master and Local Files
- Benchmarking and economic analysis
- Design and implementation of TP policies
- Audit defense and FTA representation
With a strong understanding of UAE regulations and global TP principles, PEAK BCS ensures that your related-party transactions are both compliant and tax-efficient.
Get in touch at https://www.peakbcs.com/ to discuss how they can support your transfer pricing strategy.
10. Conclusion
Transfer pricing compliance is now a critical aspect of doing business in the UAE under the Corporate Tax framework. As the Federal Tax Authority intensifies its oversight of related-party dealings, businesses must take proactive steps to align their internal pricing policies with global standards.
Establishing solid documentation, conducting benchmarking studies, and seeking expert advice from firms like PEAK Business Consultancy Services can safeguard your business from financial and legal risks.
To ensure your business meets transfer pricing obligations and optimizes its tax strategy, connect with PEAK BCS at https://www.peakbcs.com/.
