Transfer pricing has become an important tax consideration for businesses operating in the UAE. This is especially true for companies that have transactions with related parties or connected persons.

A business may have a UAE parent company, an overseas subsidiary, a related distributor, or another group entity providing services. The prices used in these transactions can affect the taxable income of the businesses involved.

The UAE Corporate Tax framework requires certain related-party transactions to follow the arm’s length principle. This means the conditions and prices should be consistent with what independent businesses would agree under comparable circumstances.

Understanding these rules can help businesses establish appropriate pricing, maintain supporting records, and reduce compliance risks.

What Is Transfer Pricing?

Transfer pricing refers to the pricing of transactions between related parties.

These transactions can include:

• Sale or purchase of goods

• Management services

• Administrative services

• Intercompany loans

• Royalties

• Intellectual property arrangements

• Shared business costs

• Financial guarantees

• Distribution arrangements

For example, suppose a UAE company purchases products from a related company based overseas.

The two companies may agree on the price themselves. However, the relevant question for transfer pricing purposes is whether that price reflects an arm’s length outcome.

An independent buyer and seller would normally negotiate based on commercial factors such as market conditions, functions performed, risks assumed, and the value of the goods or services.

Transfer pricing rules are designed to assess related-party transactions from this independent-party perspective.

What Is the Arm’s Length Principle?

The arm’s length principle is the foundation of transfer pricing.

It requires related-party transactions to be priced as though the parties were independent of each other.

Consider a UAE distribution company that purchases products from its overseas parent.

The parent manufactures the products, while the UAE company performs local distribution, marketing, and customer support.

The transfer price should reflect the functions performed, assets used, and risks assumed by each company.

The analysis is not simply about finding the highest or lowest possible price. It is about determining whether the arrangement produces an outcome that independent parties could reasonably agree to.

This makes the underlying facts and commercial circumstances important.

Which UAE Businesses Should Review Transfer Pricing?

Transfer pricing is particularly relevant to businesses that conduct transactions with related parties or connected persons.

These may include:

Multinational Groups

International groups often have transactions between companies located in different countries.

Examples include:

• Goods purchased from a foreign parent

• Management services received from a regional headquarters

• Loans between group companies

• Royalty payments

• Shared technology costs

These arrangements can create transfer pricing considerations in the UAE and other jurisdictions.

UAE Corporate Groups

Transfer pricing is not limited to international transactions.

Businesses operating through multiple UAE entities may also need to review transactions between related companies.

For example, one company may provide accounting, HR, IT, or management services to another group company.

Free Zone Businesses

Businesses operating in UAE Free Zones should also consider transfer pricing when they conduct transactions with related parties.

Free Zone status does not automatically remove transfer pricing considerations.

The applicable Corporate Tax rules and the specific facts of the transaction should be reviewed before determining the appropriate treatment.

Family-Owned Businesses

Large family business groups often operate through several companies.

One entity may own property, another may provide management services, and another may conduct trading activities.

Where these companies are related, the pricing of transactions between them may require transfer pricing consideration.

Common Related-Party Transactions

Transfer pricing can apply to many different types of business arrangements.

Management and Administrative Services

A group company may provide management, accounting, HR, legal, or IT services to another company.

The business should be able to explain:

• What services were provided

• Who performed them

• What costs were incurred

• What benefit the receiving company obtained

• How the charge was determined

Intercompany Loans

Related companies may lend money to each other.

The interest rate and other financing terms can become relevant when assessing whether the transaction reflects an arm’s length arrangement.

The analysis may consider factors such as the loan amount, duration, currency, borrower profile, security, and prevailing market conditions.

Sale and Purchase of Goods

Trading groups often purchase products from related manufacturers or suppliers.

The transfer pricing analysis may consider the functions performed by each party and the risks associated with manufacturing, inventory, distribution, credit, and market activities.

Royalties and Intellectual Property

A group may charge another entity for the use of trademarks, software, patents, technology, or other intellectual property.

The business should maintain evidence supporting the arrangement and the commercial basis for the payment.

Shared Costs

Related companies sometimes share expenses for software, employees, offices, marketing, or other resources.

These costs should not simply be allocated using an arbitrary percentage.

The allocation should have a reasonable commercial basis that reflects the services or resources received.

UAE Transfer Pricing Documentation

Documentation is an important part of transfer pricing compliance.

Depending on the taxpayer and applicable thresholds, UAE businesses may need to maintain transfer pricing documentation, including a Local File and Master File.

The UAE Ministry of Finance states that the Local File and Master File requirements can apply where a taxable person has revenue of at least AED 200 million in the relevant tax period, or where the taxable person is part of a multinational enterprise group with consolidated group revenue of at least AED 3.15 billion in the relevant financial period, subject to the applicable rules.

Businesses should therefore determine their documentation obligations based on their specific circumstances rather than assuming that every related-party transaction requires the same level of documentation.

Documentation may contain information about the group, the taxpayer, related-party transactions, functional analysis, transfer pricing methodology, and supporting financial information.

The Five Main Transfer Pricing Methods

The UAE transfer pricing framework recognises several methods for determining whether a transaction is consistent with the arm’s length principle.

1. Comparable Uncontrolled Price Method

The Comparable Uncontrolled Price method compares the price charged in a controlled transaction with the price charged in a comparable transaction between independent parties.

For example, if similar products are sold to both related and unrelated customers under comparable conditions, those transactions may provide useful evidence.

The method can be powerful when reliable comparable transactions are available.

2. Resale Price Method

The Resale Price method starts with the price at which a product is resold to an independent customer.

An appropriate gross margin is then considered for the functions performed by the reseller.

This method can be relevant for distribution businesses that purchase products from related parties and resell them to independent customers.

3. Cost Plus Method

The Cost Plus method starts with the costs incurred by the supplier.

An appropriate mark-up is then added based on the functions performed and the risks assumed.

This approach may be relevant for certain manufacturing, service, or supply arrangements.

4. Transactional Net Margin Method

The Transactional Net Margin Method, commonly known as TNMM, examines the net profit margin achieved in a controlled transaction.

The relevant profit indicator may then be compared with results from comparable independent businesses.

TNMM is commonly considered where reliable gross-margin comparisons are difficult to obtain.

5. Transactional Profit Split Method

The Profit Split method considers the combined profits generated by related parties and determines how those profits should be divided based on their respective contributions.

This method can become relevant where transactions involve highly integrated operations or valuable unique contributions.

How Should a Business Choose a Transfer Pricing Method?

There is no single method that automatically works for every transaction.

The appropriate approach depends on the facts.

Businesses should consider:

• The nature of the transaction

• Functions performed by each party

• Assets used

• Risks assumed

• Contractual terms

• Economic circumstances

• Characteristics of the goods or services

• Availability and reliability of comparable data

This analysis is often referred to as a functional analysis.

Why Functional Analysis Matters

Functional analysis is one of the most important parts of a transfer pricing review.

It examines the functions performed, assets used, and risks assumed by each party.

Consider a UAE company that distributes products for a related overseas manufacturer.

The UAE company may handle:

• Warehousing

• Local marketing

• Customer relationships

• Inventory management

• Credit collection

The overseas company may handle:

• Manufacturing

• Product development

• Intellectual property

• Production risks

These differences matter when determining an appropriate transfer pricing approach.

A company should therefore avoid selecting a transfer pricing method before understanding how the parties actually operate.

A Simple UAE Transfer Pricing Example

Imagine that a UAE company receives management services from its overseas parent.

The parent provides finance oversight, strategic planning, HR support, and technology services.

The UAE company pays AED 500,000 annually for these services.

Before accepting the charge, the business should consider several questions.

What services were actually provided?

Did the UAE company receive an identifiable benefit?

What resources did the parent use?

How were the costs calculated?

Is the pricing consistent with an arm’s length approach?

What evidence supports the charge?

A proper review can help establish whether the arrangement is commercially reasonable and properly documented.

The example also demonstrates why a transfer pricing analysis involves more than simply checking the amount shown on an invoice.

Common Transfer Pricing Mistakes

Businesses can create unnecessary compliance problems through relatively simple mistakes.

Using Arbitrary Prices

A related company may agree on a price without considering independent-market conditions.

A commercial relationship between group companies does not automatically make the agreed price an arm’s length price.

Copying Another Company’s Policy

A transfer pricing policy that works for one company may not work for another.

Different businesses have different functions, risks, markets, contracts, and operating structures.

Ignoring Smaller Transactions

Businesses sometimes focus only on large transactions.

However, recurring management fees, loans, royalties, or service charges can also require review.

The relevant rules should be considered based on the nature and circumstances of the transactions.

Choosing a Method Without Proper Analysis

Selecting a transfer pricing method first and trying to justify it later can produce weak documentation.

The method should follow the facts rather than the other way around.

Poor Supporting Records

A business may have a reasonable pricing arrangement but lack evidence to demonstrate how the price was determined.

Contracts, invoices, calculations, financial information, benchmarking studies, and correspondence can help establish the commercial basis of the transaction.

Waiting Until a Tax Review

Transfer pricing documentation is easier to prepare when the underlying information is available.

Businesses should maintain relevant records as part of their normal tax compliance process rather than attempting to reconstruct everything later.

How Businesses Can Prepare for Transfer Pricing Compliance

A practical transfer pricing review can begin with a simple transaction mapping exercise.

Step 1: Identify Related Parties

Prepare a list of related companies and connected persons that transact with the business.

Step 2: Map the Transactions

Record the nature and value of each relevant transaction.

For example:

Transaction	Related Party	Value	Key Consideration
Management services	Parent company	AED 600,000	Services and benefit
Intercompany loan	Group company	AED 5 million	Interest rate and terms
Product purchases	Related supplier	AED 12 million	Pricing and distribution margin
Royalty	Group IP owner	AED 1 million	IP use and commercial benefit

Step 3: Understand the Functions

Document what each party actually does.

Look at employees, assets, decision-making, operational responsibilities, and risks.

Step 4: Select the Appropriate Method

Consider the available transfer pricing methods and determine which approach provides the most reliable analysis for the transaction.

Step 5: Review Comparable Data

Where appropriate, use reliable comparable information to assess whether the transaction produces an arm’s length outcome.

Step 6: Maintain Supporting Documentation

Keep contracts, invoices, calculations, financial data, benchmarking information, and other relevant records.

Step 7: Review the Position Regularly

Business structures change.

New companies may be created, new services may be introduced, and transaction volumes may increase.

Transfer pricing arrangements should therefore be reviewed when material business changes occur.