Tax Consultants in Dubai | UAE Tax Accounting Agents
UAE Transfer Pricing Compliance: Documentation, Benchmarking and FTA Requirements
UAE Transfer Pricing: What Businesses Need to Know
A UAE company can have a transaction that is perfectly valid from an accounting perspective and still
need to examine it from a transfer pricing perspective. This is particularly relevant when money, goods,
services, financing or intellectual property move between businesses or individuals that fall within the UAE
Corporate Tax definitions of Related Parties or Connected Persons.
The practical question is not simply whether an invoice exists. Businesses need to be able to explain how
the commercial terms were established and why the result is consistent with the arm’s length principle.
For that reason, transfer pricing should be connected with the company’s accounting records, contracts,
commercial decisions and Corporate Tax compliance process.
What Does Transfer Pricing Mean for a UAE Company?
Transfer pricing deals with the economic terms used for transactions between parties that have a specified
relationship. In a business group, for example, one company may purchase inventory from another group
company, receive management support from it or borrow funds from it.
Those arrangements can create transfer pricing questions because the parties are not necessarily
negotiating with the same degree of independence as unrelated businesses.
Examples include:
Why the Arm’s Length Principle Matters
The arm’s length principle provides the basic economic reference point for UAE transfer pricing. Instead of
accepting a group-company price simply because both parties agreed to it, we consider the conditions that
independent businesses might have accepted in a comparable situation.
Imagine a UAE company paying a related overseas company for management support. A proper review
could look at the actual work performed, the people involved, the resources used, the risks taken, the
benefit received and the price or margin that can be supported using suitable independent information.
The purpose is to create a logical connection between the transaction and its economic substance.
Which Transactions Should UAE Businesses Review?
A transfer pricing review should begin with transaction mapping. Rather than searching for transfer pricing
issues after the accounts are closed, the business can identify its relevant relationships and transactions
during the financial year.
The review can cover both UAE and international arrangements where the relevant Corporate Tax rules
apply. Free Zone location by itself does not mean that a relevant transaction can be ignored.
Related Parties and Connected Persons: Start With Identification
One of the most important practical steps is determining who falls within the relevant relationship
definitions. A business that has incomplete ownership or relationship records can easily overlook a
transaction that requires tax review.
We recommend maintaining a simple relationship register containing the entity or person’s name, ownership or relationship basis, jurisdiction, type of transaction and relevant accounting information.
The register should be reviewed when ownership, management arrangements or group structures change.
We recommend maintaining a simple relationship register containing the entity or person’s name, ownership or relationship basis, jurisdiction, type of transaction and relevant accounting information.
The register should be reviewed when ownership, management arrangements or group structures change.
How to Build a UAE Transfer Pricing File
A useful transfer pricing file should allow another professional to understand the transaction without having
to reconstruct the company’s history from scattered emails and accounting entries.
-
Business and Group Profile
Explain what the UAE company does, how it earns revenue, where key activities are performed and how it fits within the wider group. -
Relationship Map
Identify the relevant Related Parties and Connected Persons and explain the relationship that brings them into the transfer pricing review. -
Transaction Register
Create a transaction-by-transaction schedule showing the counterparty, transaction type, value, currency, agreement and accounting treatment. -
Functional Review
Document who performs important functions, which assets are used and which party bears economically relevant risks. This is commonly organised as a Functions, Assets and Risks analysis. -
Contractual Evidence
Keep signed agreements, amendments and other documents that explain the commercial arrangement. The written contract should be considered alongside what the parties actually do. -
Financial Support
Retain invoices, ledgers, financial statements, calculations and other records connecting the transfer pricing analysis with the company’s accounts. -
Economic Support
Where appropriate, retain the benchmark or other economic analysis used to support the arm’s length conclusion.
UAE Transfer Pricing Benchmarking Explained
Benchmarking is not simply the process of finding a percentage on the internet. A meaningful benchmark
begins by defining the transaction and identifying independent businesses or transactions that have
sufficiently comparable economic characteristics.
Depending on the case, the review may consider:
- Nature of the Service or Product
- Functions Carried Out by Each Party
- Assets and Resources Used
- Commercial and Operational Risks
- Market and Geographical Factors
- Contractual Conditions
- Business Size and Operating Model
- Availability and Quality of Comparable Financial Data
A benchmark becomes less persuasive when the selected companies perform substantially different
functions or operate under materially different circumstances.
Choosing a Transfer Pricing Method
The appropriate method depends on the transaction. A method should be selected because it fits the
economic circumstances and because sufficiently reliable information is available to apply it.
Comparable Uncontrolled Price (CUP)
The CUP approach looks for a comparable independent transaction and compares its price with the
controlled transaction. Reliable direct price comparisons can make this approach particularly informative.
Resale Price Method
This method starts with the price at which a product is sold to an independent customer and works
backwards after considering an appropriate gross margin for the reseller.
Cost Plus Method
The cost-plus approach begins with an appropriate cost base and adds a supportable mark-up. It can be
relevant to certain service, manufacturing and support arrangements.
Transactional Net Margin Method (TNMM)
TNMM examines an appropriate net profitability indicator and compares the tested result with suitable
independent businesses or transactions.
Transactional Profit Split Method
The profit-split approach considers the combined economics of the controlled arrangement and allocates
the relevant profit between participating parties using an appropriate basis.
Intercompany Loans: A Separate Transfer Pricing Review
A group loan should be analysed as a financing transaction rather than treated as an ordinary accounting
entry. The economic features of the borrowing arrangement can influence the arm’s length result.
Two loans within the same group can have very different risk profiles. Consequently, applying an identical
rate without considering the circumstances may not provide an adequate economic explanation.
Transfer Pricing and UAE Free Zone Businesses
A Free Zone company should still review relevant Related Party and Connected Person transactions under
the UAE Corporate Tax framework. The location of the entity does not, by itself, answer the transfer pricing
question.
Free Zone businesses should therefore include related-party arrangements in their Corporate Tax review
and separately consider any conditions attached to reliefs or special tax treatments they claim.
Master File and Local File: When Should a Business Check the Requirement?
Not every UAE taxpayer is required to prepare a Master File and Local File. The requirement depends on
the conditions and thresholds in the applicable UAE Corporate Tax framework.
The Master File generally gives a group-level picture of the multinational enterprise, while the Local File
focuses more closely on the UAE taxpayer, its relevant controlled transactions and the economic analysis
supporting those transactions.
Businesses should verify the applicable thresholds and requirements for the relevant Tax Period before
deciding that documentation is or is not required.
What Evidence Can Support an FTA Transfer Pricing Review?
A strong file should tell one consistent story: what the business agreed to, what the parties actually did,
how the amount was calculated and why the result is commercially supportable.
Keeping evidence contemporaneously can be much easier than attempting to recreate the commercial
history several years later.
Common Transfer Pricing Problems in UAE Businesses
Using a Fixed Mark-Up Without Analysis
A business may apply the same mark-up to every service arrangement simply because it has done so in the past. That approach does not automatically establish an arm’s length result.
Treating Every Group Company as Economically Identical
Two related companies can have very different functions, assets and risks. Their transactions should therefore be assessed according to their actual circumstances.
Choosing Comparables Only Because They Produce a Desired Result
A benchmark should be selected through a defensible comparability process rather than working backwards from a preferred percentage.
Ignoring the Accounting-Tax Reconciliation
The transfer pricing analysis should be reconciled with the amounts recorded in the financial statements and used in the Corporate Tax computation.
Preparing the File at the Last Minute
Late preparation can lead to missing agreements, incomplete transaction schedules and weak evidence for the underlying commercial position.
A Simple Annual Transfer Pricing Workflow
Businesses can turn transfer pricing into a repeatable annual process instead of a one-off document
exercise.
Phase 1: Map
Update the ownership and relationship structure and list relevant controlled transactions.
Phase 2: Understand
Review the business purpose, contractual terms and actual functions performed by each party.
Phase 3: Test
Select the appropriate methodology and perform benchmarking or other economic analysis where required.
Phase 4: Reconcile
Compare the transfer pricing outcome with accounting records and Corporate Tax calculations.
Phase 5: Document
Keep the agreements, calculations and supporting evidence together and update the file when material circumstances change.
Advance Pricing Agreements in the UAE
The UAE has an Advance Pricing Agreement framework. An APA can provide a formal mechanism for
addressing the arm’s length pricing of qualifying controlled transactions or arrangements. Businesses
considering this route should review the current FTA APA guidance and eligibility requirements before
applying.
UAE Transfer Pricing Compliance Checklist
Frequently Asked Questions About Transfer Pricing in the UAE
What is transfer pricing compliance in the UAE?
It is the process of reviewing relevant transactions with Related Parties or Connected Persons to determine whether their pricing and terms are consistent with the UAE arm’s length principle and to maintain the documentation required by the applicable Corporate Tax rules.
Does transfer pricing apply to transactions inside the UAE?
Relevant domestic transactions can fall within UAE transfer pricing rules. Transfer pricing is not restricted to transactions between a UAE business and an overseas company.
Do Free Zone companies have to consider transfer pricing?
A Free Zone company should review relevant Related Party and Connected Person transactions. Free Zone status alone does not remove transfer pricing considerations.
What is an arm’s length transaction?
An arm’s length transaction is one whose pricing and conditions are considered by reference to what independent parties would reasonably agree in comparable circumstances.
What is transfer pricing benchmarking?
Benchmarking is an economic comparison used to assess whether the price or profitability of a controlled transaction is consistent with suitable independent transactions or businesses.
What documents are useful for transfer pricing compliance?
Useful records can include agreements, invoices, accounting data, functional analysis, benchmarking work, pricing calculations, correspondence and evidence supporting the actual performance of services or delivery of goods.
Which transfer pricing methods are recognised in the UAE?
The UAE framework recognises the Comparable Uncontrolled Price, Resale Price, Cost Plus, Transactional Net Margin and Transactional Profit Split methods.
Do intercompany loans fall under transfer pricing?
Yes. Related-party financing should be reviewed using the arm’s length principle, with attention to factors such as interest, maturity, credit risk and other financing terms.
Is a Master File required for every UAE company?
No. Master File and Local File obligations apply when the relevant statutory conditions and thresholds are met. The applicable requirements should be checked for the relevant Tax Period.
Does Small Business Relief remove the arm’s length principle?
No. The FTA states that eligible taxpayers using Small Business Relief do not have to comply with the transfer pricing documentation rules, but the arm’s length principle still applies.
Can a UAE business use an Advance Pricing Agreement?
The UAE has an APA programme for qualifying controlled transactions or arrangements. Businesses should check the current FTA guidance before pursuing an APA.
