Under Articles 34 and 55 of the UAE Corporate Tax Law, entities must comply with the arm’s length principle for transactions with related parties and connected persons. This means prices and terms must be consistent with those that would have been agreed between independent parties in similar circumstances.
Why is this Important?
Proper transfer pricing compliance ensures that the company’s profits are not artificially shifted to related parties in low- or no-tax jurisdictions, which could trigger tax adjustments by the Federal Tax Authority (FTA). For Qualifying Free Zone Persons (QFZPs), failing to meet the arm’s length standard can lead to the loss of the 0% corporate tax rate and reclassification as a regular taxpayer at 9%. Compliance also protects the company from substantial penalties, prevents disputes with the FTA, and demonstrates transparency and good governance to auditors, investors, and stakeholders. In cross-border transactions, it reduces the risk of double taxation by aligning with international OECD transfer pricing principles adopted in the UAE.
For a Qualifying Free Zone Person (QFZP), adherence to transfer pricing rules is crucial to maintain preferential 0% tax rates and avoid adjustments by the Federal Tax Authority (FTA) that could result in additional tax liabilities.
Transfer Pricing Compliance
Meeting the arm’s length standard and preparing necessary documentation as per UAE regulations.
Legal Reference:
- Article 34 & 35 of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
- Ministerial Decision No. 97 of 2023 on Transfer Pricing Documentation Requirements.
Large Businesses
Companies meeting either of the following thresholds must prepare and maintain comprehensive transfer pricing documentation:
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- Annual turnover in the UAE of AED 200 million or more; or
- Consolidated group revenue of AED 3.15 billion or more (for multinational enterprise groups).
Required Documentation:
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- Local File – Detailed analysis of intercompany transactions relevant to the UAE entity.
- Master File – Overview of the multinational group’s global operations, structure, and transfer pricing policies.
- Purpose: Ensures compliance with the OECD Transfer Pricing Guidelines and transparency in dealings with related parties.
Small Businesses
Companies below the above thresholds are not required to maintain a Local File or Master File.
However, they must:
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- Apply the arm’s length principle in all related party transactions.
- Disclose related party transactions in the Corporate Tax return using the FTA’s disclosure form.
- Maintain supporting evidence (contracts, invoices, market data, and any internal pricing analysis) to justify transaction values if audited by the FTA.
- Purpose: Although simplified requirements apply, the obligation to transact at market value remains, ensuring fairness and preventing base erosion.
Failure to Comply
Can result in significant penalties, tax adjustments, and possible loss of QFZP status.