What is Transfer Pricing? A Beginner’s Guide for UAE Businesses

As the UAE introduces corporate tax, understanding transfer pricing (TP) has become essential for businesses operating in multiple jurisdictions or having transactions with related parties. If you're new to this concept, this beginner’s guide will help you grasp the basics of transfer pricing and what it means for your business in the UAE.

________________________________________

1. What is Transfer Pricing?

Transfer Pricing refers to the pricing of goods, services, or intangibles transferred between related parties (such as parent and subsidiary companies) across borders or within the same jurisdiction.

These prices directly impact the allocation of profits and tax liabilities between jurisdictions. Hence, authorities like the UAE’s Federal Tax Authority (FTA) require that such transactions follow the “Arm’s Length Principle.”

________________________________________

2. What is the Arm’s Length Principle?

The Arm’s Length Principle (ALP) is the cornerstone of transfer pricing. It states that the pricing of transactions between related parties should be the same as if the parties were unrelated and acting independently in the open market.

Example:

If a UAE-based company sells goods to its subsidiary in India, the price charged should be similar to what it would charge an unrelated Indian customer under comparable conditions.

________________________________________

3. Why Does Transfer Pricing Matter in the UAE?

With the introduction of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (effective from June 2023), transfer pricing has become mandatory for businesses meeting certain thresholds.

Here’s why it matters:

• Prevents profit shifting to low-tax jurisdictions.

• Ensures fair taxation on profits generated in the UAE.

• Avoids double taxation in cross-border dealings.

• Helps companies maintain transparency and compliance.

________________________________________

4. Who is Subject to Transfer Pricing in the UAE?

Transfer Pricing rules apply to businesses that:

• Have related party transactions (domestic or international).

• Meet the revenue threshold (AED 200 million for Master File & Local File).

• Are part of a Multinational Enterprise (MNE) group.

• Conduct transactions with connected persons (including owners or directors under certain conditions).

________________________________________

5. What are “Related Parties” and “Connected Persons”?

• Related Parties: Entities under common control or ownership (e.g., a parent company and its subsidiaries).

• Connected Persons: Individuals who have significant ownership or decision-making control over the business.

The law outlines precise definitions, and businesses are encouraged to evaluate their structure carefully.

________________________________________

6. What Kind of Transactions Are Covered?

Transfer Pricing rules cover a broad range of intragroup transactions, such as:

• Sale or purchase of goods

• Provision of services

• Royalties and license fees

• Interest on intercompany loans

• Cost-sharing arrangements

________________________________________

7. What Documentation is Required?

To comply with UAE Transfer Pricing requirements, businesses must maintain the following:

1. Disclosure Form – Filed with the Corporate Tax return.

2. Master File – Provides a global overview of the MNE group’s operations, policies, and financials.

3. Local File – Detailed documentation of the local entity’s transactions with related parties.

Failure to maintain or submit proper documentation can result in penalties.

________________________________________

8. How to Determine Arm’s Length Pricing?

The OECD and UAE Corporate Tax Law recognize five accepted methods:

1. Comparable Uncontrolled Price (CUP) Method

2. Resale Price Method

3. Cost Plus Method

4. Transactional Net Margin Method (TNMM)

5. Profit Split Method

Choosing the right method depends on the nature of the transaction, available data, and functional analysis.

________________________________________

9. Common Challenges for UAE Businesses

• Lack of internal resources or expertise

• Incorrect classification of related party transactions

• Inadequate documentation or benchmarking

• Misinterpretation of the “arm’s length” pricing

________________________________________

10. Conclusion: What Should UAE Businesses Do Now?

If your business is engaged in related-party transactions, it’s time to:

✅ Identify and document all related party dealings

✅ Assess your obligations under UAE Corporate Tax and TP regulations

✅ Maintain proper documentation (Local & Master Files)

✅ Perform a Transfer Pricing Benchmarking Study

✅ Stay updated on FTA guidance

Consulting a professional can help you stay ahead of compliance and avoid unnecessary penalties.

________________________________________

Need Help with Transfer Pricing Compliance?

At Sheikh Anwar Accounting & Auditing LLC, we offer:

• Transfer Pricing benchmarking (AED 5,500 per benchmark)

• Local File & Master File documentation

• Disclosure Form preparation

• Audit defense support

📞 Contact us today at +971 58 562 1786 or visit www.sa-auditors.com for a consultation.