Transfer Pricing Compliance in UAE: Strategy and Risk Management

With the UAE Corporate Tax regime now in full swing, Related Party Transactions have moved under the microscope. The Federal Tax Authority (FTA) wants to ensure that multinational groups and even local family conglomerates are not shifting profits to low-tax jurisdictions—or even just between entities to manipulate tax brackets.

This guide goes beyond the basic documentation requirements to discuss the strategy of Transfer Pricing (TP) compliance.

The Core Concept: Arm's Length Principle

Article 34 of the Corporate Tax Law mandates that all transactions between Related Parties must be conducted at "Arm's Length." Translation: You must charge your sister company the same price you would charge a random third-party customer for the same service.

Why It Matters

If Company A (Mainland, 9% tax) pays a huge "Management Fee" to Company B (Free Zone, 0% tax), the FTA loses revenue. If that fee isn't "Arm's Length," same tax authorities can:

1. Disallow the expense in Company A (increasing taxable profit).
2. Impose hefty penalties.
3. Open a full-scale tax audit.

Identifying Your Risks

1. Management Fees / Head Office Allocations

This is the #1 audit trigger.

• The Risk: Charging a flat "% of revenue" fee without proof of actual services rendered.
• The Fix: "Benefit Test." You must prove the subsidiary actually needed and received the service (HR, IT, Marketing) and that the cost allocation key (e.g., headcount, time spent) is logical. Specialized tax consultation services can help you structure defensible management fee arrangements.

2. Loans and Financing

• The Risk: Interest-free loans between group companies.
• The Fix: Intercompany loans generally need to carry an interest rate comparable to what a bank would charge given the borrower's credit rating.

3. Use of Intangibles (Brand/IP)

• The Risk: A subsidiary using the group brand name for free.
• The Fix: A royalty payment might be required, benchmarked against comparable licensing agreements.

4. Shared Services Centers

• The Risk: A central services entity in a Free Zone charging inflated fees to Mainland operating companies.
• The Fix: Use of cost-plus methodology with a reasonable markup (typically 5-10%).

5. Goods Trading Between Related Parties

• The Risk: Buying inventory from a related supplier at above-market prices.
• The Fix: Compare prices to independent third-party quotes or use the Comparable Uncontrolled Price (CUP) method.

Transfer Pricing Methods

The FTA accepts several methods to determine arm's length pricing:

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Farahat & Co can conduct benchmarking studies using reputable databases to support your chosen method.

The Compliance Framework

1. Master File & Local File

Required if your revenue > AED 200M.

• Master File: The "Big Picture." Group structure, global business drivers, TP policies.
• Local File: The "Specifics." Detailed transaction analysis between the UAE entity and its related parties.

2. Disclosure Form

Even if you are below the AED 200M threshold, you likely need to submit a Transfer Pricing Disclosure Form alongside your tax return if you have material related party transactions. This is where the FTA mines data for audit selection.

3. Country-by-Country Reporting (CbCR)

Required for UAE headquartered multinationals with group revenue > AED 3.15 billion. This report goes to the Ministry of Finance and shares data with other tax authorities.

Penalty Structure

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Functional Analysis: The Heart of TP

You cannot determine a price without understanding Functions, Assets, and Risks (FAR).

• Functions: Who performs the R&D? Who does the sales? Who manages the logistics?
• Assets: Who owns the IP? Who owns the inventory?
• Risks: Who bears the risk of bad debt? Who bears the FX risk?

Example: If a UAE distributor just holds stock and sells, they deserve a routine return. If they also do all the marketing and bear the currency risk, they deserve a higher margin.

Case Study: The Free Zone Trap

Situation: A family group has:

• Company A (DMCC Free Zone) – Holding IP and brand, no employees
• Company B (Dubai Mainland) – Operating all retail stores, 50 employees

Company B pays a 10% royalty on revenue to Company A for "brand usage."

Problem: Upon FTA audit, it was discovered that:

• Company A had no employees to develop or maintain the brand.
• All marketing decisions were made by Company B staff.
• The brand had minimal external recognition.

Outcome:

• The FTA disallowed 80% of the royalty payment.
• Company B's taxable income increased by AED 2 million.
• Total tax, penalty, and interest: AED 350,000.

Lesson: The economic substance must match the legal structure.

Strategic Steps for 2025

1. Map Your Transactions: Create a complete inventory of every flow between related entities (Services, Goods, Loans, IP).
2. Conduct Benchmarking: Use a database (like IBFD or Bloomberg) to find "comparables"—what do independent companies earn for similar activities?
3. Draft Intercompany Agreements: A handshake is not enough. Every managment fee or loan needs a legal contract that mirrors the economic reality.
4. Operational Alignment: Ensure your accounting actually reflects your policy. If your TP policy says "Cost + 5%," but your accounting system books "Cost + 10%," you have a compliance failure. Engaging due diligence services can help validate your transfer pricing structure before tax authority scrutiny.
5. Annual Review: Transfer prices should be reviewed annually to reflect changing economics (inflation, new services, revised scope).

Frequently Asked Questions

Do I need TP documentation if my transactions are small?

If your total related party transactions are below AED 40 million, reduced disclosure may apply. However, you still need contemporaneous documentation proving arm's length pricing in case of audit.

What if both entities are in UAE Free Zones with 0% tax?

You still need TP compliance. The FTA looks at group-wide profit allocation, and anti-avoidance rules can recharacterize transactions if there's no substance.

How do I price an interest-free loan from my parent company?

Generally, you should impute interest at a market rate. However, equity contributions (capital, not loan) have different treatment. The classification depends on the legal documentation and substance of repayment obligations.

Can I use the same TP policy as my parent company abroad?

You can use the group policy as a starting point, but it must be adapted for UAE-specific requirements and tested against UAE benchmarks.

Conclusion

Transfer Pricing is not an exact science, but it requires robust evidence. The burden of proof is on you to define why your prices are fair. Without documentation, the FTA's assessment will prevail.

Secure Your TP Position Farahat & Co's dedicated Transfer Pricing team helps you design defensible policies, conduct benchmarking studies, and prepare robust Master/Local files that withstand FTA scrutiny.

Related Resources

• Tax Consultation Services - Strategic tax planning and transfer pricing advisory
• Due Diligence Services - Validate your intercompany transaction structures
• External Audit Services - Ensure your related party transactions are properly audited
• Ministry of Economy Audit Requirements - Understanding UAE regulatory compliance
• Internal Controls Guide - Building controls for related party transactions