With the introduction of the UAE Corporate Tax regime in 2023, managing related party transactions (RPTs) has taken center stage in corporate tax compliance. Related party transactions are common in modern business structures, especially among multinational groups, family-owned businesses, and entities with shared ownership. However, under UAE tax law, these transactions must now be reviewed with a new level of scrutiny to ensure compliance, avoid penalties, and mitigate audit risks. This blog explores how businesses in the UAE can manage risk in related party transactions in line with Corporate Tax regulations.
1. What Are Related Party Transactions?
Related party transactions are dealings between two or more entities or individuals that are connected through ownership, control, or kinship. Examples include:
- Sales of goods or services between group companies
- Intercompany loans and financing arrangements
- Licensing of intellectual property within a group
- Management service charges among subsidiaries
- Business transactions between family-owned entities
Such transactions can impact a company’s taxable income if not conducted at arm’s length, making them a critical focus under UAE Corporate Tax regulations.
2. Importance of Arm’s Length Principle
Under UAE tax law, particularly Articles 34 and 35 of the Corporate Tax Law, related party transactions must comply with the Arm’s Length Principle. This means the price, terms, and conditions must be the same as if the transaction occurred between unrelated parties in a free market.
To prove compliance, businesses must perform a transfer pricing analysis and maintain documentation supporting the pricing methodology used. This is especially important for cross-border RPTs where income shifting could occur.
3. Transfer Pricing Methods to Determine Arm’s Length
The UAE follows OECD Transfer Pricing Guidelines, which provide five primary methods to evaluate arm’s length pricing:
- Comparable Uncontrolled Price (CUP) Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method (TNMM)
- Profit Split Method
Choosing the appropriate method depends on the type of transaction, availability of comparable data, and the functions performed by each entity. A well-documented benchmarking analysis is key to reducing audit risk.
4. Documentation Requirements
To manage risk and comply with UAE Corporate Tax law, businesses must maintain and be ready to submit the following:
- Transfer Pricing Disclosure Form (submitted with the tax return)
- Master File: Provides an overview of the multinational group
- Local File: Details the UAE entity’s related party transactions
- Intercompany agreements and invoices
- Economic analysis and benchmarking reports
These documents should be retained for at least seven years and must be submitted to the Federal Tax Authority (FTA) upon request.
5. Risks Associated with Improper Related Party Transactions
Mismanagement of RPTs can expose businesses to a variety of risks, including:
- Tax Adjustments: The FTA may recharacterize income or expenses, increasing taxable income
- Penalties: Administrative penalties may be imposed for underreported tax or non-compliance
- Reputational Damage: Audit issues can erode stakeholder confidence
- Disqualification of Exemptions: Improper transactions may result in loss of free zone tax benefits
These risks emphasize the need for a proactive and well-structured transfer pricing policy.
6. Role of PEAK Business Consultancy Services
PEAK Business Consultancy Services is a premier UAE-based firm specializing in VAT, Corporate Tax, and transfer pricing advisory. As businesses navigate the complexities of related party compliance, PEAK BCS provides end-to-end support in risk assessment, transfer pricing documentation, benchmarking analysis, and audit defense.
Whether you’re part of a local business group or a multinational enterprise, PEAK BCS ensures your related party dealings are legally sound and tax-compliant.
Explore how PEAK can assist you by visiting https://www.peakbcs.com/.
7. Managing Risk Through Intercompany Agreements
One of the most effective ways to manage RPT risk is by drafting clear intercompany agreements that outline the scope of services, payment terms, pricing basis, and dispute resolution mechanisms. These contracts should align with the business’s actual conduct and the pricing documented in the transfer pricing files.
Proper legal and tax review of these agreements is essential to withstand scrutiny by the FTA.
8. Periodic Reviews and Internal Controls
To remain compliant, businesses should periodically review related party transactions and update pricing based on changing market conditions or economic performance. This includes:
- Reassessing pricing annually
- Conducting functional analysis of parties involved
- Performing internal audits on intercompany arrangements
- Training staff to identify and report RPTs
Automated tracking through ERP systems can also help ensure that transactions are properly recorded and analyzed.
9. Special Attention for Free Zone Entities
Free zone companies must exercise extra caution when engaging in RPTs. The 0% Corporate Tax benefit is available only on “qualifying income.” If RPTs are not at arm’s length or involve mainland UAE transactions, this could jeopardize their preferential tax status.
Free zone companies should conduct a careful review of all intercompany dealings and maintain strict documentation to validate compliance with the law.
10. PEAK BCS: Your Transfer Pricing Risk Advisor
PEAK Business Consultancy Services provides specialized services to help businesses identify and mitigate risks associated with related party transactions. These include:
- Transfer pricing health checks
- Preparation of Master and Local Files
- Benchmarking studies using global databases
- Drafting and reviewing intercompany contracts
- FTA audit support and representation
With deep expertise in UAE tax law and international transfer pricing principles, PEAK BCS ensures your related party transactions meet all regulatory expectations.
For tailored assistance, visit https://www.peakbcs.com/.
11. Conclusion
Related party transactions are not inherently problematic, but under the UAE Corporate Tax regime, they must be managed with precision and care. Ensuring arm’s length pricing, proper documentation, legal agreements, and continuous monitoring are essential to avoid compliance risks and maintain tax efficiency.
With professional guidance from PEAK Business Consultancy Services, businesses can establish sound transfer pricing practices that meet legal standards while aligning with commercial objectives.
Don’t wait for a tax audit to uncover compliance gaps. Secure your position with expert advice from https://www.peakbcs.com/ and ensure your related party transactions are audit-ready and tax-efficient.
