With the introduction of the UAE Corporate Tax under Federal Decree-Law No. (47) of 2022, businesses in the United Arab Emirates must now align with international tax principles, particularly in relation to transactions with related parties. One such cornerstone principle is the Arm’s Length Principle (ALP), which ensures that related party transactions are conducted under terms and conditions that are comparable to those agreed upon by independent entities.
This blog explores what the Arm’s Length Principle means, how it is applied in the UAE, its importance in transfer pricing compliance, and what businesses must do to align with the law. For enterprises seeking compliance and strategic tax planning, PEAK Business Consultancy Services is a leading VAT and corporate tax consultancy that offers professional support tailored to UAE businesses.
1. What Is the Arm’s Length Principle?
The Arm’s Length Principle is a globally accepted standard in international taxation that requires the terms of any transaction between related parties to be comparable to those between unrelated parties operating under similar conditions. The purpose is to prevent profit shifting or artificial deflation/inflation of taxable income through manipulated pricing.
This principle is at the heart of transfer pricing regulations and is supported by the OECD Transfer Pricing Guidelines, which many countries — including the UAE — refer to when implementing corporate tax law.
2. Related Parties Under UAE Law
According to Article 35 of the UAE Corporate Tax Law, a “related party” may include:
- Any entity or person with direct or indirect ownership/control over another business
- Members of the same group (e.g., subsidiaries, branches)
- Individuals related by blood or marriage to the business owner (up to the 4th degree)
Transactions with related parties must be evaluated using the Arm’s Length Principle to ensure fair market value is applied.
Unsure if your transactions meet arm’s length standards?
PEAK Business Consultancy Services can help assess, document, and restructure your related party dealings to ensure full compliance with UAE transfer pricing rules.
3. Methods to Determine Arm’s Length Pricing
The UAE Corporate Tax regime permits several OECD-aligned methodologies to determine arm’s length pricing. These include:
- Comparable Uncontrolled Price (CUP) Method: Comparing the price of a transaction between related parties with similar transactions between unrelated parties.
- Resale Price Method: Evaluating the resale margin added to a product purchased from a related entity and sold to a third party.
- Cost Plus Method: Adding a markup to the cost incurred by the supplier to reflect market-level profitability.
- Transactional Net Margin Method (TNMM): Comparing net profit margins to those in similar third-party transactions.
- Profit Split Method: Allocating combined profits between related entities based on their contribution.
The choice of method depends on the nature of the transaction, availability of data, and industry practices.
4. Transfer Pricing Documentation Requirements
To demonstrate compliance with the Arm’s Length Principle, the UAE Corporate Tax Law mandates specific documentation:
- Disclosure Form: A form that must be submitted along with the corporate tax return for companies meeting certain thresholds.
- Master File: Provides a global overview of the business group, including its operations, intangibles, and financial activities.
- Local File: Contains detailed information on the taxpayer’s intercompany transactions, pricing method, comparables, and functional analysis.
These documents must be maintained and presented to the Federal Tax Authority (FTA) upon request.
Need Help Creating Your Transfer Pricing Files?
Our experts at PEAK Business Consultancy Services can help you prepare Master and Local files that comply with UAE transfer pricing law and OECD standards. Avoid penalties and ensure audit-readiness.
5. Importance of Functional and Economic Analysis
Complying with the Arm’s Length Principle requires a thorough understanding of:
- Functions performed (e.g., manufacturing, distribution, marketing)
- Assets employed (e.g., machinery, trademarks)
- Risks assumed (e.g., inventory, credit, market)
This analysis, known as a functional analysis, is a critical component of transfer pricing documentation and helps identify the appropriate pricing method and comparables.
6. Transfer Pricing Thresholds
The FTA has announced that businesses meeting certain revenue or transaction volume thresholds are required to file detailed documentation. While specific thresholds may be updated periodically, as a general guideline:
- Businesses with revenue exceeding AED 200 million must prepare both Master and Local Files.
- Smaller businesses may be required to file a Disclosure Form even if they’re not preparing full documentation.
Even businesses below the threshold should maintain basic documentation to justify pricing in related party transactions.
7. Impact of Non-Compliance
Failure to comply with arm’s length pricing rules and documentation requirements may lead to:
- Additional tax assessments by the FTA
- Transfer pricing adjustments that increase taxable income
- Monetary penalties and legal consequences
Proactive compliance is not just a legal requirement but a best practice to safeguard your business during audits.
8. Role of PEAK Business Consultancy Services
Transfer pricing and application of the Arm’s Length Principle require a blend of legal, financial, and economic expertise. PEAK Business Consultancy Services provides comprehensive support to UAE businesses through:
- Transaction analysis and pricing strategy
- Master and Local file preparation
- Disclosure form assistance
- FTA audit defense and documentation review
- Training and internal policy development
Our tax experts ensure that your related party transactions are compliant, defensible, and optimized for long-term sustainability.
9. Conclusion
The Arm’s Length Principle is a critical element in the UAE’s corporate tax and transfer pricing landscape. Its proper application protects against profit shifting and ensures tax fairness. With the UAE aligning closely with OECD guidelines, businesses must take their transfer pricing obligations seriously, especially when dealing with related parties or operating within business groups.
To ensure your business meets compliance obligations and maximizes its tax position, partner with PEAK Business Consultancy Services — the trusted VAT and corporate tax consultancy firm for UAE businesses. From analysis to filing, our team helps you stay compliant and ready for the future of corporate taxation in the UAE.
