Ever priced a deal with a related company, only to realise later it wasn’t quite at market rate? The Federal Tax Authority (FTA) just told taxpayers exactly what to do about it, and the rules are more taxpayer-friendly than many expected, provided you keep your paperwork in order.
The FTA’s new Corporate Tax Public Clarification, CTP011, spells out how a business should handle downward transfer pricing adjustments: situations where fixing a related-party price actually reduces your taxable income.
The Basic Rule
Under Article 34(1) of the UAE Corporate Tax Law, any transaction between related parties (a loan, a service fee, a sale of goods, management charges, whatever it is) must be priced the way two unrelated companies would price it. This is called the arm’s length principle.
In practice, deals aren’t always struck at that “market” price when they’re first recorded. Maybe a loan was interest free between group companies, or a service was charged at cost with no markup. When that happens, the law says: don’t rewrite your financial statements. Instead, correct it in your Corporate Tax Return through a transfer pricing adjustment.
That adjustment can go either way:
– Upward adjustment: your taxable income goes up (you under-priced something you sold, or under-charged interest you should have earned).
– Downward adjustment: your taxable income goes down (you over-priced something, or recorded an expense that was actually too low compared to what arm’s length would require).
Why Downward Adjustments Get Special Attention?
Anyone can see why the FTA is more careful about downward adjustments: they reduce the tax bill. So CTP011 sets out exactly what’s expected.
1. No pre-approval needed, but be ready for an audit.
Corporate Tax in the UAE runs on self-assessment. You don’t need the FTA’s blessing before making an adjustment in your return; you decide, you file. But that adjustment can absolutely be picked apart in a tax audit later, so it needs to hold up.
2. Disclose it, no matter how small.
Normally, related-party transactions only need to be disclosed in the tax return if they cross certain value thresholds. That threshold protection disappears the moment you make a downward adjustment. Every single downward adjustment must be disclosed, regardless of the transaction’s value or nature.
3. Keep your evidence file ready.
If you make a downward adjustment, you should be able to produce:
– The rationale: why the original price wasn’t arm’s length, and how the revised number gets you there.
– An arm’s length analysis, including a proper benchmarking study.
– A reconciliation between what’s in your financial statements and what you’ve reported in the tax return.
– Proof that the related party on the other side of the deal made a matching (symmetrical) adjustment.
One important boundary: CTP011 only covers adjustments a taxpayer makes on its own under Article 34(1). It does not cover the separate “corresponding adjustment” mechanisms in Articles 34(10) and 34(11), which deal with adjustments triggered by the FTA or by a foreign tax authority. That distinction matters more than it sounds.
See the example below:
Here’s a scenario that comes up constantly in UAE group structures, and it shows exactly how CTP011 plays out in practice.
> A Co and B Co are related parties, both based in the UAE, both taxed at the standard 9% Corporate Tax rate.
> B Co lends money to A Co, and, as is common within groups, charges no interest.
> A Co determines that an arm’s length interest rate for a loan like this would be 6%.
What should A Co do?
Since A Co is the borrower, an arm’s length loan would have come with an interest expense. Because A Co’s books show no interest cost, its taxable income is currently higher than it should be. To fix this, A Co makes a downward adjustment in its tax return, deducting the notional 6% interest it would have paid at arm’s length.
This is a textbook CTP011 situation: A Co should proactively (suo moto) make the downward adjustment, no FTA sign-off required, but it must disclose the full loan arrangement in its return regardless of the amount, and keep its benchmarking study and rationale on file.
What about B Co?
B Co is the lender. If it recorded no interest income, its taxable income is currently lower than it should be. B Co needs to make an upward adjustment, adding back the 6% interest income it should have earned at arm’s length.
An important distinction is that B Co’s upward adjustment is not a corresponding adjustment made by the FTA under Articles 34(10) and 34(11), which deal with FTA-initiated corresponding adjustments to eliminate double taxation arising from a transfer pricing adjustment. CTP011 expressly states that these provisions are outside its scope. Instead, B Co has an independent obligation under Article 34(1) to apply the arm’s length principle and make the required upward adjustment in its own tax return.
What B Co’s adjustment does, is act as useful supporting evidence for A Co. It shows both sides of the deal are being priced consistently at 6%, which is exactly the kind of “symmetrical corresponding adjustment” documentation CTP011 asks A Co to maintain.
Bottom line for A Co and B Co: two separate, self-driven adjustments, one down and one up, each grounded in the same 6% benchmark, each properly documented, and each disclosed regardless of size.
Businesses with intercompany transactions should consider professional Transfer Pricing Services in UAE to ensure pricing aligns with the arm’s length principle and FTA expectations.
What This Means for Your Business?
CTP011 gives businesses real flexibility: no need to queue up for FTA approval every time a related-party price needs correcting. But that flexibility comes with a trade-off. The burden of proof sits entirely with you, and it can be tested in an audit at any point.
If you’re reviewing related-party transactions before filing, our Corporate Tax Services in Dubai can help assess transfer pricing adjustments and maintain compliance with UAE Corporate Tax regulations.
Practical takeaways:
– Review related-party arrangements (loans, service fees, management charges, cost-sharing) for pricing gaps before filing.
– Where a downward adjustment is needed, build the benchmarking study and reconciliation file at the same time you make the adjustment, not after an audit notice arrives.
– Confirm the related party on the other side has made (or will make) its own matching adjustment, and keep that as evidence.
– Remember CTP011 covers only Article 34(1) self-driven adjustments. Corresponding adjustments under 34(10)/34(11) are a different process entirely.
CTP011 doesn’t change the law. It just tells taxpayers how the FTA expects them to apply it. For businesses with intercompany loans, service arrangements, or cost allocations that were never quite benchmarked, now’s the time to close that gap.
