What Is Transfer Pricing Local File Preparation? Transfer pricing local file preparation is the process of compiling and documenting detailed information about a UAE business’s controlled transactions with Related Parties and Connected Persons, together with the functional, economic, financial, and transfer pricing analysis needed to demonstrate that those transactions follow the arm’s length principle. In practical terms, the Local File is the UAE entity focused part of the three tier transfer pricing documentation framework, alongside the Master File and Country by Country Report.
Why Is a Local File Important in the UAE?
The UAE Corporate Tax Law introduced formal transfer pricing documentation requirements as part of the country’s corporate tax framework. Article 55 of Federal Decree Law No. 47 of 2022 requires a Taxable Person that meets the conditions prescribed by the Minister to maintain a Master File and a Local File. The framework is designed to help the Federal Tax Authority, or FTA, assess whether related party and connected person transactions have been priced on an arm’s length basis.
Ministerial Decision No. 97 of 2023 sets the main thresholds for maintaining the files. A Taxable Person must maintain both a Master File and Local File where, during the relevant Tax Period, it is part of an MNE Group with consolidated group revenue of at least AED 3.15 billion, or where the Taxable Person’s own revenue is at least AED 200 million. The Decision also specifies which categories of controlled transactions are included in the Local File and provides exclusions from documentation for certain transactions.
What Does Transfer Pricing Local File Preparation Involve?
Local File preparation is more than putting intercompany invoices into a report. It requires the business to connect its actual commercial activities, agreements, accounting records, and related party transactions with an economic analysis that supports the prices or margins used.
1. Understanding the UAE entity
The preparation normally starts with the company’s legal and ownership structure, business activities, management structure, operating model, markets, and strategy. This establishes the commercial context for the transfer pricing analysis.
2. Identifying controlled transactions
The preparer identifies relevant transactions and arrangements with Related Parties and Connected Persons. These may include purchases and sales of goods, management or support services, royalties and intellectual property arrangements, financing, guarantees, cost allocations, and other intercompany dealings.
3. Performing a functional analysis
A functional analysis examines the functions performed, assets used, and risks assumed by each party. This is commonly called a FAR analysis. It helps determine what each party actually contributes to the transaction and is central to selecting and applying an appropriate transfer pricing method.
4. Reviewing agreements and financial data
Intercompany agreements, invoices, general ledger data, audited or unaudited financial statements, budgets, and other supporting records are reviewed. The Local File should be consistent with the underlying books and the actual conduct of the parties.
5. Selecting the most appropriate method
The UAE transfer pricing rules recognise the OECD based methods, including Comparable Uncontrolled Price, Resale Price, Cost Plus, Transactional Net Margin Method, and Profit Split. The appropriate method depends on the facts, transaction characteristics, functions, assets, risks, and availability of reliable comparable data.
6. Conducting comparability and benchmarking analysis
Where appropriate, comparable companies or transactions are analysed to determine an arm’s length price, margin, or range. The analysis should explain the selection criteria, geographic and industry considerations, financial adjustments where relevant, and why the selected comparables are sufficiently reliable.
7. Testing the controlled transaction
The selected transfer pricing method is applied to the actual transaction. The resulting price or profitability is compared with the arm’s length outcome, and any differences are explained.
8. Preparing the Local File
The findings are brought together into a structured Local File containing the required business, transaction, functional, economic, and financial information. The final document should be internally consistent and supported by source records.
What Information Is Included in a UAE Transfer Pricing Local File?
The UAE FTA’s Transfer Pricing Guide describes the Local File as the detailed part of the standardised documentation framework. In practice, a robust UAE Local File generally covers the following areas:
- An overview of the local entity and its business activities.
- Relevant ownership and organisational information.
- Descriptions of the controlled transactions and arrangements.
- The value of the transactions and the Related Parties or Connected Persons involved.
- A functional analysis covering functions, assets, and risks.
- The contractual terms and relevant commercial circumstances.
- The transfer pricing method selected and the reasons for selecting it.
- The application of the method to the controlled transaction.
- Comparability analysis and benchmarking support where applicable.
- Financial information used in the analysis and reconciliation to the entity’s financial statements where relevant.
- Copies or descriptions of relevant intercompany agreements and other supporting documentation.
- Information about relevant prior agreements, rulings, or other transfer pricing arrangements where applicable.
Who Needs to Prepare a Local File in the UAE?
The principal thresholds under Ministerial Decision No. 97 of 2023 are straightforward. A Taxable Person is required to maintain both a Master File and a Local File if either of the following applies during the relevant Tax Period:
- The Taxable Person is a Constituent Company of an MNE Group with total consolidated group revenue of AED 3.15 billion or more.
- The Taxable Person’s own revenue is AED 200 million or more.
Meeting the threshold does not mean every transaction automatically belongs in the Local File. Ministerial Decision No. 97 sets out the transactions and arrangements that are to be included and provides specific exclusions. This is why a proper scope assessment should be performed before the Local File is prepared.
Does Every UAE Business Need a Local File?
No. The Local File requirement is subject to the thresholds and conditions in the applicable UAE transfer pricing rules. However, businesses should not confuse exemption from maintaining a Local File with exemption from the arm’s length principle. UAE transfer pricing rules require transactions between Related Parties and Connected Persons to follow the arm’s length principle even where a taxpayer is not required to maintain a Local File.
What Is the FTA’s Role?
The Federal Tax Authority administers the UAE Corporate Tax regime and may request transfer pricing documentation from a Taxable Person. Under Article 55 of the Corporate Tax Law, documentation that is required to be maintained must generally be submitted to the FTA within 30 days following a request, or within another later date directed by the Authority.
The FTA can also request information supporting the arm’s length nature of related party and connected person transactions. For this reason, a Local File should be prepared as a contemporaneous compliance document rather than assembled hastily after receiving an FTA request.
Local File Vs Master File
| Document | Main focus | Purpose |
| Local File | UAE entity and its controlled transactions | Provides detailed functional, economic, transaction and financial analysis supporting the local entity’s arm’s length outcomes. |
| Master File | MNE Group as a whole | Provides a high level view of the group’s global business, transfer pricing policies, intangibles, financing and financial and tax position. |
| CbCR | Country by country group data | Provides jurisdiction level information on revenue, profit, taxes and other indicators for qualifying MNE groups. |
How BCL Globiz Can Help With Local File Preparation
BCL Globiz provides UAE focused transfer pricing support covering transfer pricing documentation, benchmarking, functional analysis, intercompany arrangements, and Local File preparation. Its approach is designed to connect the economic analysis with the UAE entity’s actual transactions and financial information, helping businesses build documentation that is practical and aligned with UAE transfer pricing requirements.
Relevant service: BCL Globiz Transfer Pricing Services in Dubai: https://bcl.ae/transfer-pricing-services-dubai-2/
A Practical Local File Preparation Checklist
- Confirm whether the UAE entity meets the Local File threshold.
- Map all Related Parties and Connected Persons.
- Prepare a complete inventory of controlled transactions.
- Collect intercompany agreements and supporting invoices.
- Document the functions, assets, and risks of each relevant party.
- Review the accounting and financial data supporting each transaction.
- Select and document the most appropriate transfer pricing method.
- Perform benchmarking or comparability analysis where required.
- Reconcile the tested results with the financial records.
- Review the Local File for consistency with the Corporate Tax return, disclosure information, agreements, and actual conduct.
- Maintain supporting documents so they can be provided to the FTA if requested.
Frequently Asked Questions
What is a transfer pricing Local File?
A transfer pricing Local File is a detailed document that explains a UAE entity’s controlled transactions and supports the arm’s length basis of those transactions through business, functional, economic, and financial analysis.
When is a Local File required in the UAE?
Under Ministerial Decision No. 97 of 2023, a Taxable Person generally must maintain a Local File where its own revenue is at least AED 200 million or where it is a Constituent Company of an MNE Group with consolidated group revenue of at least AED 3.15 billion, subject to the Decision’s conditions and exclusions.
Does the FTA receive the Local File every year automatically?
No. The Local File is a record that must be maintained when the applicable requirements are met. Article 55 provides that the FTA may request the required documentation, generally with a 30-day response period unless another date is directed.
Is benchmarking part of Local File preparation?
Benchmarking is often a key part of the economic analysis, particularly where a transaction needs to be tested against independent market outcomes. The exact analysis depends on the transaction and the selected transfer pricing method.
Can a company prepare a Local File after an FTA request?
A taxpayer may have to provide the documentation after an FTA request, but good compliance practice is to prepare and maintain the Local File on a timely basis. This gives the business time to identify data gaps and address inconsistencies before a tax authority review.
Who can help prepare a UAE Local File?
A UAE tax and transfer pricing adviser such as BCL Globiz can support the scoping, functional analysis, benchmarking, documentation, and review process for a Local File.
