Introduction
With the introduction of corporate tax in the UAE, Transfer Pricing (TP) regulations have brought greater focus to benchmarking salaries, particularly for Key Management Personnel (KMP). When KMP qualify as Connected Persons, their compensation must be assessed through the lens of the arm’s length principle, making salary benchmarking a critical compliance requirement. However, limited local data and the evolving regulatory landscape create challenges in establishing appropriate benchmarks. This article explores key considerations in benchmarking KMP salaries in the UAE, the practical difficulties involved, and how businesses can approach compensation structuring to meet TP and corporate tax expectations.
Relevance and Applicability?
Payments or benefits to Connected Persons are deductible only if they are wholly for business purposes and reflect Market Value, as per the Arm’s Length Principle under Article 34 of the Decree-Law.
- Director/Officer [36(2)(b)]: A director or Officer of the taxable person
- Kinship with Owner/Director/Officer [36(2)(c)]: Any related Party of the owner, director, or officer of the taxable person.
As per the above, any remuneration or payment received by Director/ Officer/ Related party of such director or officer should comply with Arm’s length principle.
THE BENCHMARKING PROCESS – A CASE STUDY
Facts of the Case
XYZ UAE (‘the Company’) is engaged in the trading of wellness and veterinary products, distributing them directly to international customers through its various online platforms. The Company remunerates Miss. A – connected person serving as Managing Director, – for the provision of managerial and administrative services.
Miss A oversees global supply, compliance, and vendor management. She ensures legal compliance, handles licensing, manages supplier and agent relationships, and coordinates with external advisors across 11 countries.
Benchmarking Process
To comply with transfer pricing rules, a benchmarking analysis is done to check if the compensation matches market rates for similar roles in logistics and management services.
- Analysis 1: CUP (Comparable Uncontrolled Price)
The CUP method is the most direct for arm’s length pricing when comparable third-party data is available and reliable. If the Company in incurring salary expenses to individuals who are non-connected persons, then that can be used as a CUP. Or if external data is available to compare, then it can be used based on reliability of data.
- Analysis 2: TNMM (Transactional Net Margin Method)
In the absence of direct comparables for executive salaries, the Transactional Net Margin Method (TNMM) provides an effective approach to benchmarking the KMP salary within the parameters of transfer pricing. The Company shall maintain its Operating Profit Margin (Operating Profit to Operating Revenue – OP/OR) at a minimum level in line with the interquartile range as identified in the transfer pricing benchmarking analysis.
Step 1- Database Search: A search was consulted in order to find financial information of functionally comparable companies to XYZ. (Examples are TP Catalyst, Eikon Workspace, UAE HR Reports, etc)
Step 2 – Review of Companies: The manual review helps exclude companies that are not functionally comparable to the tested activity. This is done by carefully reviewing each company’s business description, mainly using their website.
Step 3 – Final Comparable Set: This section lists the selected functionally comparable companies, along with brief business descriptions. Their financial data was used to build the arm’s-length range.
- Analysis 3: Other Method
Given the transaction nature, an alternative method was applied. Per Article 34(4) of the UAE Corporate Tax Law, if the five standard transfer pricing methods (CUP, RPM, CPM, TNMM, Profit Split) are unsuitable, taxpayers may use another method aligned with the arm’s length principle, supported by strong documentation.
This could involve using industry standard reports, benchmarks for UAE salaries provided by surveys, etc.
Review the key provisions of the UAE Corporate Tax Law that govern connected-person remuneration.
Challenges in Benchmarking KMP Remuneration
- Limited Guidance: UAE TP regulations provide little specific direction for benchmarking KMP pay, making assessments complex.
- Comparability Issues: Unique, multifunctional roles—especially in owner-managed businesses—make external benchmarking difficult.
- Data Constraints: Market data for executive roles in the UAE, especially in niche sectors, is limited.
- Audit Risk: Misaligned remuneration may attract FTA scrutiny, leading to disputes or adjustments. Understand the FTA’s Transfer Pricing Disclosure Form requirements before finalizing KMP pay.
- Profit Shifting Flags: Compensation that deviates significantly from market norms may be seen as a means of shifting profits or avoiding tax.
Conclusion
Salary benchmarking is essential to ensure compensation aligns with market standards while complying with transfer pricing rules. Accurate benchmarking helps mitigate tax risks, supports fair remuneration for key personnel, and maintains transparency in related-party transactions. By using reliable data and appropriate methods, businesses can justify salaries that reflect the roles’ responsibilities, risks, and functions, ensuring regulatory compliance and minimizing disputes.
See how remuneration claims are treated under UAE corporate tax and what documentation you’ll need.
How BCL Globiz helps?
Benchmarking salaries for Connected Persons, particularly Key Management Personnel, is crucial for Transfer Pricing compliance and reducing tax risks. Precise valuation, functional analysis, and comprehensive documentation ensure that salary payments reflect true economic substance and comply with regulatory requirements. At BCL Globiz, we support businesses by identifying suitable salary comparables, performing in-depth analyses, and preparing strong documentation to justify KMP salaries. Our customized approach ensures compensation aligns with the arm’s length principle and UAE regulations, helping clients mitigate risks and maintain robust Transfer Pricing positions.
For further assistance, reach out to our expert rakesh@bclglobiz.com and check out our website www.bcl.ae.
