Entrepreneurs establishing a company in the UAE, including Dubai, should consider the full range of rules governing the country’s corporate tax regime. One of the most technically complex aspects of that regime is the transfer pricing rules in the UAE, which regulate the pricing of transactions between related parties.
- Documentation thresholds trigger distinct Disclosure Form, Local File, Master File, and CbCR obligations; misjudging these can quietly escalate into significant penalty exposure.
- Interest on intra-group loans is high-risk: arm’s length notional interest may be required and the Specific Interest Deduction Limitation Rule can deny deductions even for market-rate debt.
- QFZPs and large groups should treat transfer pricing as a strategic issue: loss of QFZP status or absence of an APA can completely change the group’s effective tax profile.
This article provides a detailed overview of the key features of the UAE transfer pricing regime.
Transfer Pricing: Concept and Purpose
Where transactions are made between independent companies, the parties generally negotiate and agree on terms that reflect market conditions. By contrast, where the parties are related, they are free to determine any commercial terms of their transactions, including setting prices at their own discretion. As a result, profits may be artificially shifted to those jurisdictions that offer more favourable corporate tax regimes.
To address this issue, transfer pricing rules were developed as part of international tax practice. Their fundamental principle is that transactions between related parties should be conducted on terms consistent with those that would be agreed between independent parties under comparable market conditions.
Currently, this principle underlies the tax legislation of many countries. With the introduction of company taxes in the UAE, transfer pricing rules were incorporated into the national legislation as well, as part of the country’s efforts to align its tax system with internationally recognised standards.
Legal Framework for Transfer Pricing in the UAE
The UAE transfer pricing rules were introduced alongside the UAE corporate tax and are primarily governed by the following legislation and guidance:
- Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses;
- Ministerial Decision No. 97 of 2023 as regards Maintaining Transfer Pricing Documentation;
- Transfer Pricing Guide developed by the UAE Federal Tax Authority as of 2023 (however, it is not a legally binding document).
Persons Subject to the Transfer Pricing Rules
Related Parties
The transfer pricing rules apply to a company’s transactions with certain categories of persons. The UAE legislation introduces two concepts: Related Parties and Connected Persons.
The following are recognised as Related Parties:
| Category | When treated as Related |
|---|---|
|
Individuals |
Related up to the fourth degree of kinship or affiliation. |
|
An individual and a legal entity |
the individual, alone or together with its Related Parties, directly or indirectly:
|
|
Two and more legal entities |
|
|
Permanent establishment |
A person and its permanent establishment (including a foreign one). |
|
Unincorporated Partnership |
Partners in the same unincorporated partnership. |
|
Trust or Foundation |
|
The concept of control under UAE legal framework is broadly consistent with its generally accepted meaning in international practice. In essence, control refers to the ability of one person to influence another and may be established, for example, where a person can:
- exercise 50% or more of the voting rights;
- appoint 50% or more of the members of the board of directors;
- receive 50% or more of the profits; or
- determine the activities of another person or otherwise exercise significant influence over it.
The existence of control is determined on a case-by-case basis, taking into account all relevant facts and circumstances. For example, where one company provides a loan to another company in an amount equal to 50% of the latter’s share capital and simultaneously begins directing its business strategy, pricing decisions, and customer relationships, the two companies may be regarded as related parties for transfer pricing purposes.
Connected Persons
A separate category comprises persons connected with the taxpayer company. These include:
- persons holding an ownership interest in the company;
- persons exercising control over the company;
- directors and officers of the taxpayer company; and
- related parties of any of the persons listed above.
Payments made to connected persons must also be consistent with market conditions. Otherwise, such payments will not be deductible for the purposes of reducing the tax base.
In the absence of personal income tax in the UAE, the rules governing connected persons acquire particular importance. They are designed to prevent companies from reducing their taxable profits through excessive payments to their shareholders or directors.
Arm’s Length Principle and Transfer Pricing Analysis
The fundamental principle of transfer pricing applicable to transactions between related parties and connected persons (controlled transactions) is the arm’s length principle. Under this principle, the terms of such transactions (primarily, the price) must be consistent with market conditions, that is, with the terms that would have been agreed upon between independent parties under comparable circumstances.
The application of the arm’s length principle to controlled transactions generally involves the following steps:
- identifying the company’s related parties and connected persons;
- analysing the terms of the transaction and the commercial environment in which it takes place;
- performing a comparability analysis;
- selecting the most appropriate transfer pricing method; and
- determining the arm’s length price using the selected transfer pricing method.
The transfer pricing methods provided for under UAE legislation are discussed below.
Transfer Pricing Methods
UAE legislation follows international practice, in particular the OECD Transfer Pricing Guidelines, and recognises five internationally accepted transfer pricing methods.
Comparable Uncontrolled Price Method
The Comparable Uncontrolled Price Method (CUPM) compares the price charged in a controlled transaction with the price charged in a comparable transaction between independent parties.
The method may rely on either:
- internal comparable transactions, where one of the parties to the controlled transaction enters into comparable transactions with independent parties; or
- external comparable transactions, where the comparison is made with comparable transactions between two or more independent parties.
CUPM is generally regarded as the most direct method for determining whether a controlled transaction complies with the arm’s length principle. However, its application requires a high degree of comparability between the controlled and uncontrolled transactions, including with respect to:
- characteristics of the goods or services;
- contractual terms;
- scope of the transactions;
- timing of the transactions; and
- other relevant factors.
Where material differences cannot be reliably adjusted, another transfer pricing method should be used.
Resale Price Method
The Resale Price Method (RPM) is used where goods purchased from a related party are subsequently resold to an independent party. Under this method, the resale price serves as the starting point. It is then reduced by the reseller’s gross resale price margin, as well as any other costs associated with the transaction.
The method may rely on either:
- internal comparable, where the comparison is based on similar transactions between the same reseller and independent parties; or
- external comparable, where the comparison is based on similar transactions between independent parties.
The RPM is generally appropriate for distribution and resale activities where the goods are not substantially modified before resale. It is less suitable where the reseller adds significant value to the goods, for example through the use of valuable intangible assets, such as its own brand.
Cost Plus Method
Under the Cost Plus Method (CPM), the price of a controlled transaction is determined by adding a cost-plus mark-up to the costs incurred by the supplier of the goods or services. The mark-up should correspond to that which an independent party would earn in comparable circumstances.
The method is primarily used for the supply of semi-finished goods, the provision of services, and manufacturing or supply arrangements. As with the CUPM and the RPM, both internal and external comparable transactions may be relied upon.
When applying the CPM, particular attention is paid to the comparability of:
- the functions performed;
- the assets employed;
- the risks taken; and
- the cost base to which the arm’s length mark-up is applied.
Where material differences between the controlled and comparable transactions cannot be reliably adjusted, another transfer pricing method should be used.
Transactional Net Margin Method
The Transactional Net Margin Method (TNMM) compares the net profit margin earned in a controlled transaction with the net profit margin that independent parties would earn in comparable circumstances. The net profit margin is measured against an appropriate financial base, such as:
- sales (revenue);
- costs; or
- assets.
As with the other traditional transfer pricing methods, the TNMM may be applied using either internal or external comparable transactions.
In practice, the TNMM is often used where other transfer pricing methods cannot be reliably applied because comparable data on prices or gross profit margins are unavailable.
Profit Split Method
Under the Profit Split Method (PSM), the combined profits of the related parties or connected persons from a controlled transaction are analysed, as well as the allocation of profits between the parties. The allocation is considered to be economically feasible if it reflects the division of profits that independent parties would have agreed under comparable circumstances.
The method is primarily used where:
- the parties’ activities are highly integrated and interdependent;
- each party makes a unique and valuable contribution to the transaction, for example through the use of its valuable intangible assets; or
- the parties jointly assume economically significant risks.
In these circumstances, the application of one-sided transfer pricing methods often does not produce a reliable result.
The application of the PSM generally involves two main steps:
- determining the combined profits arising from the controlled transaction; and
- allocating those profits between the parties based on the relative value of each party’s contribution, taking into account the functions performed, assets employed, risks assumed, and any other factors relevant to the creation of economic value.
Other Transfer Pricing Methods and Selection of an Appropriate Method
Alternative transfer pricing methods may be used where none of the methods described above can be applied to determine an arm’s length price with sufficient reliability. In such cases, the taxpayer should be able to provide:
- documentation supporting the selection of an alternative method;
- an economic justification for its application; and
- the results of the transfer pricing analysis.
In general, UAE legislation does not establish a hierarchy of transfer pricing methods. For each transaction, the selected method should enable to determine an arm’s length price as reliably as possible. In making this determination, the following factors are taken into account:
- the strengths and limitations of each method;
- the nature of the transaction;
- the availability of reliable information on comparable transactions; and
- the degree of comparability between the controlled transaction and the comparable uncontrolled transaction.
In certain cases, more than one transfer pricing method may be used where this results in a more reliable and well-supported outcome.
Transfer Pricing Adjustments in the Tax Return
Following the transfer pricing analysis, the taxpayer is required to calculate its taxable income on an arm’s length basis. Where the actual price of a controlled transaction does not comply with the arm’s length principle, the necessary adjustments must be made in the corporate tax return.
Adjustments that increase taxable income may be made by the taxpayer without restriction, whereas adjustments that result in decreased taxable income are allowed only with the approval of the Federal Tax Authority (FTA). The FTA may also make transfer pricing adjustments on its own initiative.
The principal consequences of non-compliance with the transfer pricing rules include:
- additional corporate tax assessments;
- administrative penalties, including for filing an inaccurate tax return or failing to submit the required transfer pricing documentation within the prescribed time limit; and
- the loss of status for qualifying free zone persons in the UAE (see the section below for details).
Transfer Pricing Documentation
Transfer Pricing Documentation comprises the information, analyses, and calculations prepared by a taxpayer company to demonstrate that its transactions with related parties and connected persons comply with the arm’s length principle.
The UAE transfer pricing documentation requirements are structured in several tiers and depend on the scale of the taxpayer’s activities. The baseline requirements apply to all taxpayers entering into controlled transactions, while additional documentation obligations arise once the relevant thresholds are met.
Baseline Documentation Requirements
The minimum documentation requirement applicable to all taxpayers entering into controlled transactions is to retain records demonstrating that the terms of those transactions comply with the arm’s length principle.
In addition, it is advisable to prepare a written transfer pricing analysis supporting the established prices. Where a company has numerous related parties and the volume of controlled transaction is significant, it is generally advisable to engage a transfer pricing specialist to prepare a formal transfer pricing analysis.
Transfer Pricing Disclosure Form
The FTA may require taxpayers to disclose information on their controlled transactions where the following thresholds are met:
- transactions with related parties: the aggregate value exceeds AED 40 million during the relevant tax period. In addition, separate disclosure is required for each category of transactions (goods, services, intellectual property, interest, assets, liabilities, among others) where the aggregate value of that category exceeds AED 4 million;
- transactions with connected persons: the aggregate amount paid to one connected person exceeds AED 500,000.
The Transfer Pricing Disclosure Form forms part of the Corporate Tax Return and must be submitted together with the return within nine months after the end of the relevant tax period.
Local File and Master File
The need to keep a Local File and a Master File is determined according to the following rules:
| Taxpayers | Required Documentation |
|---|---|
|
A UAE company with revenue of AED 200 million or more during the relevant tax period that is not a member of a group of companies, or is a member of a local group (i.e. a group with no foreign subsidiaries) |
A Local File only |
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A UAE company with revenue of AED 200 million or more during the relevant tax period that is a member of an international group of companies (regardless ofa total consolidated group revenue) |
Both a Master File and a Local File |
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A UAE company with revenue of less than AED 200 million during the relevant tax period that is a member of an international group of companies that has a total consolidated group revenue of AED3.15 billion or more |
Both a Master File and a Local File |
|
A UAE company with revenue of less than AED 200 million during the relevant tax period that is not a member of a group of companies, or is a member of a local group |
no obligation to keep either a Master File or a Local File |
The Master File and the Local File contain the following information:
| Master File | Local File |
|---|---|
|
General information about an international group of companies, such as:
|
Is completed for the specific UAE company and includes:
|
It should be noted that the Local File is not required for all controlled transactions. Instead, it is prepared only in respect of transactions with certain categories of counterparties that are subject to specific tax rates or tax regimes, including:
- non-residents of the UAE;
- persons exempt from corporate tax;
- residents benefiting from the Small Business Relief regime; and
- residents subject to different corporate tax rates (for example, Qualifying Free Zone Persons in the UAE).
Nevertheless, controlled transactions that are not included in the Local File must still comply with the arm’s length principle, and the taxpayer must be able to demonstrate this upon request by the FTA.
The Local File and the Master File should be prepared as of the date of the transactions and must be submitted to the FTA within 30 days of a request.
Country-by-Country Reporting
The Country-by-Country Reporting (CbCR) requirements apply to multinational enterprise (MNE) groups where:
- the group is headquartered in the UAE; and
- the group’s consolidated revenue for the preceding financial year is equal to AED 3.15 billion or more.
The CbCR filing process consists of two stages:
| Stage | Deadline |
|---|---|
|
The ultimate parent company submits a notification to the FTA confirming that it will file the CbCR |
no later than the last day of the reporting financial year |
|
Submission of the CbCR |
within 12 months after the end of the reporting financial year |
The CbCR provides a consolidated overview of the group’s global allocation of income, taxes, and economic activity. In particular, it includes information on:
- the amount of profit attributable to each jurisdiction;
- the amount of tax accrued and tax paid in each jurisdiction;
- the location of the group’s economic activity (including the number of employees, assets, among other indicators); and
- a list of all constituent entities within the group, together with a description of their principal business activities.
Particular attention should be paid to loans between related parties in the context of the UAE transfer pricing rules. Although such transactions are permitted under UAE legislation, they must comply with:
- the general requirement that the interest rate be determined in accordance with the arm’s length principle; and
- the specific limitations on the deductibility of interest.
The application of these rules can be illustrated by the following example. An individual shareholder provides an interest-free loan to their own UAE company, which is a connected person for transfer pricing purposes. For such a transaction, the loan must be provided on market terms, that is, comparable to those that would have been agreed between independent parties under comparable circumstances.
Therefore, even where the loan agreement provides for a zero interest rate, the taxpayer must determine an arm’s length interest rate when calculating its taxable income. By way of illustration, such a rate might be around 5–7%, although the actual rate must be established based on the comparability analysis. The taxpayer must then make an appropriate transfer pricing adjustment by calculating the corresponding notional interest income on a self-assessment basis.
In addition, even where the interest rate is determined on an arm’s length basis, the borrower’s ability to deduct the interest may still be restricted. The Specific Interest Deduction Limitation Rule is intended to prevent the artificial creation of interest expenses within a group and applies where a loan is used to finance:
- the payment of dividends or other profit distributions to a related party;
- a redemption, repurchase, reduction, or return of share capital to a related party;
- a capital contribution to a related party; or
- the acquisition of an ownership interest in a person that is, or becomes, a related party.
In such cases, interest on the loan is, as a general rule, not deductible for corporate tax purposes. However, this limitation does not apply where the taxpayer can demonstrate that obtaining a tax benefit was not the main purpose, or one of the main purposes, of the loan.
Under UAE legislation, there is generally no tax benefit where the lender is subject to corporate tax, or a substantially similar tax, at a rate of at least 9%.
Transfer Pricing Requirements for Qualifying Free Zone Persons
Companies established in UAE free zones, particularly those seeking Qualifying Free Zone Persons (QFZPs) status and the possibility to benefit from the associated 0% corporate tax rate, merit separate consideration.
For a QFZP, compliance with the transfer pricing rules is one of the conditions for maintaining its qualifying status. In particular, a QFZP must:
- prepare audited financial statements on an annual basis;
- apply the arm’s length principle to its controlled transactions; and
- maintain the required transfer pricing documentation.
Failure to comply with these requirements results in the loss of QFZP status. The loss of status takes effect from the beginning of the tax period in which the company ceased to satisfy the relevant conditions. As a result, the company becomes subject to the 9% corporate tax rate on its overall taxable income.
Advance Pricing Agreements
In December 2025, the FTA issued the Guidance on Advance Pricing Agreements (APAs). An APA is an agreement between a taxpayer and the FTA that determines in advance the transfer pricing method and the criteria for applying the arm’s length principle to specific controlled transactions over a specified period.
Provided that the taxpayer complies with the agreed terms, the FTA undertakes not to challenge the pricing applied to the covered transactions. This mechanism therefore provides greater tax certainty and reduces the risk of future disputes with the tax authorities.
Taxpayers may apply for an APA where they intend to enter into controlled transactions with an aggregate (expected) value of AED 100 million or more during a tax period. In considering an APA application, the FTA will also take into account:
- complexity of the controlled transactions;
- potential tax risk; and
- overall appropriateness of entering into an APA.
The APA is concluded for a period of three to five tax periods. During the initial phase of implementing the APA programme, however, APAs may only be concluded in respect of future tax periods.
Practical Recommendations for Businesses
The practical application of the UAE corporate tax regime shows that, for companies entering into transactions with related parties, compliance with the transfer pricing rules often becomes one of the most complex and costly aspects of tax compliance.
To reduce tax risks and additional costs, businesses are therefore advised to:
- assess the need to apply the transfer pricing rules at the stage of incorporating a company in the UAE;
- identify related parties and connected persons and analyse which transactions may qualify as controlled transactions;
- assess in advance the scope of documentation that will need to be prepared, as well as the related time and financial costs;
- ensure that the terms of controlled transactions comply with the arm’s length principle, including by substantiating prices, interest rates on loans, and other commercial terms;
- avoid postponing the preparation of transfer pricing documentation until the filing of the tax return, as conducting the analysis, obtaining comparable data, and selecting an appropriate transfer pricing method require time;
- take into account specific tax rules applicable to certain types of intra-group transactions, particularly loans between related parties; and
- consider entering into an Advance Pricing Agreement with the FTA.
Conclusion
Transfer pricing rules form an integral part of the UAE tax regime and represent a key compliance requirement for companies entering into transactions with related parties and connected persons. Such companies should:
- ensure that the terms of controlled transactions comply with the arm’s length principle;
- select the most appropriate transfer pricing method;
- prepare supporting documentation; and
- comply with the specific requirements established under UAE corporate tax legislation.
Experience with the application of the new rules demonstrates that transfer pricing matters should be addressed at an early stage, including when incorporating a company in Dubai or in other UAE emirates and when planning intra-group transactions. This approach allows businesses to assess potential tax implications in advance, determine the scope of their compliance obligations, and minimise the risk of disputes with the FTA.
Tags: UAE
