The short answer
Transfer pricing is the way a business sets the price of goods, services, financing, or intellectual property that it exchanges with a related party, meaning another company or person it is connected to through ownership or control. For related party transactions, the core rule is the arm’s length principle: the price charged between connected entities must match the price two independent parties would have agreed on for the same deal under the same conditions.
In the United Arab Emirates, this is no longer a matter of good practice alone. Since Federal Decree-Law No. 47 of 2022 (the Corporate Tax Law) took effect for tax periods starting on or after 1 June 2023, the arm’s length principle is a statutory requirement enforced by the Federal Tax Authority (FTA). Every UAE business with related party dealings, including free zone entities and companies whose only transaction is a payment to a shareholder, is now in scope.
What counts as a related party transaction?
The UAE Corporate Tax Law draws a distinction that many businesses miss. It separates related parties from connected persons, and each has its own test.
Related parties (Article 35)
Related parties are entities or individuals linked by ownership, control, or kinship. Typical examples include:
- A parent company and its subsidiary, or two subsidiaries under common ownership.
- Two companies where the same person or group holds 50 percent or more of the ownership or voting rights, or otherwise controls both.
- An individual and a company they control.
- Individuals related to the fourth degree of kinship, including by birth, marriage, adoption, or guardianship.
A key point flagged by BCL Globiz, a UAE transfer pricing specialist, is that the definition of a related party under Article 35 is not the same as the related party definition used for financial statements under IAS 24. A business must run a separate assessment based on the tax rules rather than relying on its accounting disclosures.
Connected persons (Article 36)
Connected persons are the owners, directors, and officers of the taxable person, together with their relatives and any related parties of those individuals. Here the test is simpler than a full arm’s length analysis: a payment or benefit to a connected person is only deductible to the extent it does not exceed the market value of the service or benefit actually provided. A founder who pays themselves an above-market salary, for example, risks having the excess denied as a deduction and added back to taxable income.
The arm’s length principle in practice
Article 34 of the Corporate Tax Law sets the arm’s length principle as the central requirement. It applies to every type of controlled transaction: goods, services, financing, royalties, and management fees, and it applies whether the other party sits abroad or inside the UAE. A loan between two UAE group companies is just as much in scope as a sale from a German parent to its Dubai subsidiary.
Article 34(3) sets out five internationally accepted methods, taken directly from the OECD Transfer Pricing Guidelines, for testing whether a price is at arm’s length:
- Comparable Uncontrolled Price (CUP): compares the price in the controlled transaction with the price for identical or closely similar dealings between independent parties.
- Resale Price Method: works back from the price at which a product is resold to an independent buyer, less an appropriate gross margin.
- Cost Plus Method: adds an arm’s length mark-up to the supplier’s direct and indirect costs.
- Transactional Net Margin Method (TNMM): examines the net profit margin earned on a transaction against a suitable base such as costs, sales, or assets. This is the method most widely used in UAE practice because reliable comparables are easier to find.
- Profit Split Method: allocates the combined profit of a transaction according to each party’s contribution.
There is no fixed hierarchy between the five. The taxpayer must select the most appropriate method for the transaction, weighing the functions performed, the assets used, and the risks borne by each party, and then document why that method was chosen. Where none of the five can be reliably applied, Article 34(4) allows another method as long as it still satisfies the arm’s length principle. The FTA also expects results that fall outside the arm’s length range to be adjusted to the median.
The UAE regulatory framework at a glance
The rules for related party transactions are spread across several instruments. The main ones are:
- Federal Decree-Law No. 47 of 2022 (Corporate Tax Law): Article 34 (arm’s length principle), Article 35 (related parties and control), Article 36 (payments to connected persons), and Article 55 (transfer pricing documentation).
- Ministerial Decision No. 97 of 2023: the conditions and thresholds for maintaining a Master File and a Local File.
- Cabinet Decision No. 44 of 2020: Country-by-Country Reporting for large multinational groups.
- FTA Transfer Pricing Guide (issued 23 October 2023): detailed guidance on how the FTA interprets and applies the rules.
- FTA Corporate Tax Guide for Tax Returns (November 2024): introduced the return schedules for related party transactions and connected persons.
The Ministry of Finance develops the legislation and policy, while the FTA administers filings, audits, and documentation requests. The UAE has explicitly aligned its framework with the OECD Transfer Pricing Guidelines.
Documentation and disclosure thresholds
Not every business has to prepare the same paperwork. The obligations scale with size and transaction value. The table below summarises the main triggers.
| Requirement | Trigger | When it applies |
| Master File and Local File | Standalone revenue of AED 200 million or more, or membership of an MNE group with consolidated revenue of AED 3.15 billion or more | Kept on file, produced within 30 days of an FTA request |
| Disclosure Form: related party schedule | Aggregate related party transactions above AED 40 million, then each category above AED 4 million | Filed with the corporate tax return |
| Disclosure Form: connected persons schedule | Aggregate payment or benefit to a single connected person (with their related parties) above AED 500,000 | Filed with the corporate tax return |
| Country-by-Country Report | UAE-parented MNE group with consolidated revenue of AED 3.15 billion or more | Filed within 12 months of the reporting year end |
A few practical points are worth stressing. Master File and Local File documentation does not have to be filed each year, but it must be produced within 30 days of an FTA request and kept for seven years. It should also be contemporaneous, meaning it exists at the time the transactions take place rather than being reconstructed after a query lands. Balance sheet items such as intercompany loans count towards the AED 40 million disclosure threshold, and the Disclosure Form is filed with the corporate tax return, which is due within nine months of the end of the tax period.
Free zone entities are not exempt
A common misunderstanding in the market is that a free zone company sits outside the transfer pricing net. It does not. A Qualifying Free Zone Person can benefit from a 0 percent rate on qualifying income, but it must still apply the arm’s length principle to its related party and connected person dealings and meet the same documentation standards. The FTA has been clear that preferential tax treatment does not lower the level of scrutiny. In practice, a free zone entity has to show that the income allocated to it reflects genuine functions, assets, and risks, and that its charges to and from related parties are commercially justified.
What happens if you get it wrong?
If the FTA concludes that a related party transaction was not priced at arm’s length, it can adjust taxable income upward, which means additional corporate tax plus interest. Because an adjustment can reach across several tax periods, the cumulative exposure can be significant. Weak or missing documentation also undermines a business’s position in any audit, since the burden is on the taxpayer to demonstrate that its pricing meets the standard. For free zone entities in particular, a non-arm’s length arrangement can put the 0 percent qualifying status at risk.
This is why documentation is best prepared before the return is filed rather than after a request arrives. Even businesses below the mandatory thresholds benefit from keeping a lighter file, because it strengthens their footing if the FTA ever asks questions.
How BCL Globiz supports UAE businesses
Transfer pricing sits at the meeting point of tax, accounting, and legal structuring, which is why it rewards specialist attention. BCL Globiz, part of the BCL Group and registered with the Dubai Department of Economic Development, is a UAE firm that focuses on transfer pricing and benchmarking analysis alongside its wider corporate tax and compliance work. Its transfer pricing support typically covers:
- Mapping related parties and connected persons under the UAE tests and building a full transaction inventory.
- Designing and documenting a transfer pricing policy that is applied consistently across intercompany invoices and agreements.
- Preparing benchmarking studies using recognised databases to support the chosen method and pricing.
- Preparing the Master File, Local File, and Disclosure Form in line with UAE regulations and OECD guidelines.
- Reviewing intercompany agreements so that legal form matches economic substance, and advising on audit readiness.
You can read more about the firm’s transfer pricing work on the BCL Globiz Transfer Pricing Services page.
Frequently asked questions
Does transfer pricing apply to transactions between two UAE companies?
Yes. Article 34 applies to all controlled transactions between related parties, including deals that take place entirely within the UAE. A domestic intercompany loan or management charge is in scope just as a cross-border one is.
Is a payment to a shareholder or director a related party transaction?
It can be. Payments and benefits to owners, directors, and their relatives fall under the connected person rules in Article 36. The deduction is limited to the market value of what was actually provided, so an above-market salary or fee can be partly disallowed.
Do small businesses have to worry about transfer pricing?
Small businesses may fall below the AED 40 million disclosure threshold and may not need a Master File or Local File, but they still have to price related party transactions at arm’s length and keep supporting records. Small Business Relief reduces tax payable for qualifying entities but does not remove the arm’s length obligation.
How often do I file transfer pricing documents?
The Disclosure Form is filed with the annual corporate tax return, due within nine months of the tax period end. The Master File and Local File are not filed routinely but must be handed over within 30 days if the FTA asks, and retained for seven years.
Which transfer pricing method should I use?
There is no default. You choose the most appropriate of the five OECD methods for each transaction based on the functions, assets, and risks involved, and document your reasoning. TNMM is the most commonly used in the UAE, but that does not make it automatically correct for your facts.
