As the UAE steps into a new era of corporate taxation, transfer pricing (TP) has emerged as a critical element of compliance for businesses operating here. In simple terms, transfer pricing governs how profits are allocated among related parties—and with new regulations in place, the stakes have never been higher. If you’re running a UAE business, here’s everything you need to know to stay compliant and avoid unexpected costs.
Why Has Transfer Pricing Become So Important in the UAE?
Historically, the UAE was a zero or very low-tax jurisdiction for many businesses. That changed with the introduction of a 9% Corporate Tax (CIT) under Federal Decree-Law No. 47 of 2022, effective for financial years starting on or after 1 June 2023, and the upcoming Domestic Minimum Top-up Tax (DMTT) for Large Multinational Enterprises (MNEs) from 1 January 2025. Alongside these developments, the UAE has aligned itself with global standards on transfer pricing to ensure profits reflect real economic activity.
Under these rules, the Federal Tax Authority (FTA) now pays close attention to how related parties in a group set prices for goods, services, loans, and intellectual property. UAE transfer pricing is based on the arm’s length principle, mirroring the OECD Transfer Pricing Guidelines, a hallmark of most modern tax systems.
The Legal Framework & Official References
The key sources governing transfer pricing in the UAE include:
- Federal Decree-Law No. 47 of 2022 (Corporate Tax Law): Sets out the legal basis for corporate tax and transfer pricing obligations.
- Cabinet Decision No. 85 of 2023 and Ministerial Decision No. 120 of 2023 (references based on Big Four updates): Provide clarifications on related-party definitions, the scope of transactions subject to TP, and certain compliance deadlines.
- FTA and Ministry of Finance Guidance: In late 2023 and early 2024, the FTA released Transfer Pricing FAQs and a General Explanatory Guide for Corporate Tax, which include preliminary pointers on record-keeping, acceptable pricing methods, and the potential for future Advance Pricing Agreements (APAs).
- Future APA Programme (expected 2025–2026): Though details are still emerging, the Ministry of Finance has signalled that the UAE aims to offer unilateral APAs, giving businesses a chance to agree on transfer pricing methods in advance.
By enforcing these measures, the UAE ensures that related-party transactions are consistent with market norms, preventing the artificial shifting of profits.
Arm’s Length Principle & Scope of Transactions
The arm’s length principle requires that transactions between related parties mirror what independent businesses would agree to in comparable circumstances. Specifically:
- Intra-group Services: Management or support fees must reflect the real value provided. Inflated or symbolic fees now face scrutiny.
- Intercompany Financing: Loans between group companies need arm’s length interest rates. Zero-interest or ultra-low rates might prompt the FTA to adjust the UAE entity’s taxable profit if it deems these arrangements non-commercial.
- Royalties & Intellectual Property: Any IP usage fees (e.g. trademarks, patents, software licences) should align with genuine economic value. Substance rules also apply—an IP-holding company must show real development, enhancement, maintenance, protection, and exploitation activities.
- Procurement & Distribution: Groups centralising purchasing or logistics in the UAE must demonstrate that any markups or distribution margins align with industry benchmarks.
Free zone entities claiming 0% CIT are not exempt from transfer pricing scrutiny. Indeed, failing to price mainland–free zone transactions at arm’s length could jeopardise a free zone company’s 0% status on income deemed non-qualifying.
Documentation Requirements & Thresholds
(a) TP Disclosure Form
Each taxable person (including free zone entities under certain conditions) must file a TP Disclosure Form alongside its corporate tax return, summarising related-party transactions for the accounting period.
(b) Master File & Local File
To align with OECD BEPS Action 13, the UAE is rolling out a Master File and Local File requirement for entities meeting certain size or transaction thresholds. While final thresholds await definitive FTA confirmation, early indications from advisories and Ministry of Finance commentary suggest:
- Master File: This is required if the UAE entity is part of a multinational group meeting the USD 828 million (approx. AED 3 billion) consolidated revenue threshold, mirroring global standards for country-by-country reporting.
- Local File: This is required for UAE entities exceeding a certain annual turnover or volume of related-party transactions (potentially around (USD 14-27/ AED 50–100 million), based on draft discussions). The Local File focuses on the specific UAE entity’s business and demonstrates how its transfer prices comply with the arm’s length principle.
The deadline for preparing these files typically falls in line with the CIT return filing date, generally within nine months of the financial year-end—although transitional provisions or official extensions may apply for first-time filers. Public statements suggest the FTA may grant extra time (up to 12 months) for the first reporting cycle in certain cases.
Filing Deadlines & Penalties
- Return & Disclosures: Businesses generally must file their annual CIT return (and any necessary TP forms) within nine months after their financial year-end.
- Transitional Extensions: The FTA indicated that for early adopters whose tax periods end before mid-2024, there might be extensions to facilitate a smooth first filing—e.g., up to 12 months post year-end.
- Penalties: The UAE has introduced penalty regimes that mirror established VAT and excise frameworks. Penalties for TP non-compliance can include:
- Fixed amounts for late filing or failure to submit.
- Percentages of the underpaid tax if the FTA deems a transaction incorrectly priced.
- Potential loss of free zone benefits if the entity flouts TP rules, resulting in reclassification of income from 0% to 9%.
With the FTA ramping up audits, these penalties underscore the importance of proper documentation and arm’s length pricing from day one.
Interaction with Pillar Two & Country-by-Country Reporting
Pillar Two of the OECD’s global tax reform, which the UAE implements through its Domestic Minimum Top-up Tax (DMTT), relies on detailed profit and tax data. Transfer pricing accuracy underpins those calculations. For example, if a large MNE’s UAE entity is allocated minimal profit via artificially low transfer prices, its effective tax rate could appear lower than 15%, triggering additional top-up tax obligations.
Additionally, groups that meet the USD 828 million threshold must already submit country-by-country reports (CbCR) in their home jurisdictions. Ensuring that the profit reported in the UAE aligns with the group’s CbCR data is crucial—any inconsistencies raise red flags and may result in further scrutiny from both the FTA and foreign tax authorities under mutual exchange of information protocols.
Potential for Advance Pricing Agreements (APA)
The Ministry of Finance has indicated that an APA programme is in the pipeline for late 2025 or 2026. APAs would allow businesses with complex or high-value transactions to obtain upfront agreements from the FTA on their transfer pricing methodology. While details remain forthcoming, such a mechanism can greatly reduce audit risk and future disputes—particularly for MNEs conducting large intercompany transactions through the UAE.
Practical Tips for UAE Businesses
- Early Assessment: Map all related-party transactions and determine whether you’re near or above relevant thresholds.
- Strengthen Documentation: Keep robust records of each transaction’s economic rationale and benchmarking. For example, maintain copies of service agreements, external comparables, and functional analyses.
- Align Transfer Pricing with Customs & ESR: If you import goods, check that customs declarations align with your transfer pricing. Also, if you’re benefitting from 0% in a free zone, confirm that your Economic Substance requirements sync with TP compliance.
- Review Intercompany Policies: If you previously set charges to optimise a 0% environment, you may need to adjust your pricing to meet the new reality of 9% CIT (and 15% for large MNEs).
- Consider APAs: If your group engages in significant ongoing transactions, keep an eye out for the forthcoming APA scheme. Securing an APA could provide certainty for multiple years.
How Virtuzone Can Help
Transfer pricing regulations can feel daunting, especially if you’re new to intercompany tax regulations or juggling multiple free zone and mainland entities.
At Virtuzone, we simplify tax and accounting, backed by top-tier expertise—ensuring businesses remain compliant and avoid penalties.
We can:
- Assess your intercompany agreements, benchmark key transactions, and identify potential compliance gaps.
- Help you prepare TP documentation (Master File, Local File, disclosure forms) and align them with CIT, ESR, and customs requirements.
- Advise on structuring changes that preserve tax benefits without falling foul of new rules.
- Guide you through future APA processes once the government finalises the relevant frameworks.
Our goal is to keep your UAE operations thriving, confident that you meet global best practices for transfer pricing.
The UAEs Evolving Tax Environment
The UAE’s transfer pricing regime might be new, but it is already central to the country’s evolving tax environment. By implementing OECD-aligned rules, the UAE reinforces its status as a responsible global business hub. Yet, compliance demands careful planning and thorough documentation.
Businesses that act early—reviewing intercompany transactions, preparing robust evidence, and seeking professional advice—diminish the risk of audits, penalties, or costly adjustments significantly. As the UAE continues to refine its tax framework, transfer pricing stands out as a prime area where proactive compliance is essential for protecting both the bottom line and the corporate reputation. Contact us today for your tax and accounting needs.
