What the Rules Require
The transfer pricing framework operates at three levels. All companies with related-party transactions must apply the arm's length principle and be prepared to demonstrate compliance. Companies with related-party transactions exceeding AED 40 million must prepare and maintain a Local File containing detailed analysis of each material transaction. Multinational groups with consolidated revenue exceeding AED 3.15 billion must also prepare a Country-by-Country Report.
The Local File must contain a description of the company's business operations, functional analysis (identifying the functions performed, assets used and risks assumed by each party), comparability analysis (demonstrating that the pricing is consistent with arm's length standards) and contemporaneous documentation showing the pricing was determined at the time of the transaction — not retrospectively.
Common Pitfalls
The most common errors in UAE transfer pricing involve management fees, IP licensing and intercompany loans. Management fees charged by a parent to a UAE subsidiary must reflect actual services provided — not arbitrary allocations. The fee must be justified by a functional analysis demonstrating what services are rendered, by whom, and why the charge reflects market value. Holding structures with intercompany service agreements should review these arrangements for arm's length compliance.
Intercompany financing — loans, guarantees, cash pooling — must also be priced at arm's length. A parent lending to a UAE subsidiary at 0% interest, or a subsidiary providing guarantees without compensation, creates transfer pricing exposure that the FTA's automated cross-referencing tools are designed to identify.
The Compliance Calendar
Transfer pricing documentation should be prepared contemporaneously — meaning at the time the transaction is structured, not at year-end or during a tax audit. The FTA can request documentation at any time, and the inability to produce it promptly creates a presumption of non-compliance. For companies with December year-ends, the documentation for 2025 transactions should be complete before the September 2026 tax filing deadline.
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The UAE corporate tax regime adopts the OECD arm's-length standard for transactions between related parties and between a person and its connected persons. Articles 34 and 35 of Federal Decree-Law 47 of 2022, together with Ministerial Decision 97 of 2023, set the legal architecture; the FTA's Transfer Pricing Guide (December 2023, updated 2024) supplies the operational detail. The framework applies to all taxable persons, including Qualifying Free Zone Persons — being in a free zone does not exempt you from arm's-length pricing; if anything, it intensifies scrutiny because related-party pricing has a direct effect on the qualifying-income classification.
Who Must Maintain Master File and Local File
| Documentation tier | Trigger | Refresh frequency |
|---|---|---|
| Arm's-length pricing analysis (basic) | All related-party transactions, any size | Annual |
| Local File | Revenue ≥AED 200m OR member of a group with consolidated revenue ≥AED 3.15bn | Annual, filed on FTA request |
| Master File | Member of an MNE group with consolidated revenue ≥AED 3.15bn | Annual, filed on FTA request |
| Country-by-Country Report | Ultimate parent of MNE group with consolidated revenue ≥AED 3.15bn | Annual, filed in jurisdiction of UPE |
| Disclosure form attached to CT return | Related-party transactions in aggregate ≥AED 40m, or connected-person payments ≥AED 500k | Annual, filed with return |
What the Arm's-Length Standard Actually Requires
The arm's-length standard says that prices between related parties should be the prices that would have been agreed between independent parties in comparable circumstances. The five methods (CUP, resale-price, cost-plus, TNMM and profit-split) are all available; the OECD's "most appropriate method" rule applies. In practice in the UAE, the Transactional Net Margin Method (TNMM) is the most commonly used because of the scarcity of internal comparables. Documentation should: identify the related-party transaction, characterise the parties (functions, assets, risks), select and justify the method, present the benchmarking analysis with comparables, and conclude on the arm's-length range and whether the tested transaction sits within it.
Connected Persons — the Often-Missed Category
"Related parties" captures companies under common ownership. "Connected persons" is a broader UAE-specific category that captures payments by a taxable person to its owners (where ownership ≥5%), its officers and directors, and their relatives. Payments to connected persons — salaries, fees, rent, interest on shareholder loans — must be at market levels and substantiated. The FTA can deny deduction of any element above market. This is a particular hazard for owner-operated SMEs paying themselves through service fees rather than dividends; without documented arm's-length analysis, the fee can be re-characterised on audit.
QFZP and Transfer Pricing: Why It Matters Twice
For a Qualifying Free Zone Person, transfer pricing failures have two consequences rather than one. First: the FTA can adjust pricing under the standard TP rules. Second: a mispriced related-party transaction can reclassify income from "qualifying" to "non-qualifying," potentially breaching the de minimis threshold and costing the entity QFZP status for five years. The defensive posture is to maintain TP documentation on all material related-party flows regardless of the AED 200m local-file trigger.
- Arm's-length standard applies to all related-party and connected-person transactions, regardless of size.
- Local File at AED 200m revenue; Master File and CbCR at AED 3.15bn group consolidated revenue.
- Disclosure form is required at AED 40m aggregate related-party transactions or AED 500k connected-person payments.
- Connected-person rules catch owner salaries and shareholder loan interest — document them as arm's-length.
- QFZP entities face double exposure: TP adjustment plus potential loss of qualifying-income status.
Polaris Perspective
Polaris prepares transfer pricing documentation and provides ongoing advisory for group companies operating across multiple jurisdictions. We design intercompany pricing policies that are both commercially practical and audit-ready.
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