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If your business in the UAE transacts with a parent company, a subsidiary, or any related party, whether locally or across borders, you are already inside the transfer pricing net. Since the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022) came into force on 1 June 2023, every controlled transaction must be priced at arm’s length. That is not negotiable.
Knowing that transfer pricing applies is not the same as choosing the correct transfer pricing method. Using an inappropriate method or applying one without enough justification can lead to an FTA adjustment to taxable income, higher tax liability, and possible penalties.
This blog covers the five types of transfer pricing methods recognised by the UAE’s Federal Tax Authority (FTA). It clearly explains when each is appropriate and assists you in making a defensible choice, not just a convenient one.
Before exploring the methods, it is crucial to understand what each one aims to determine.
The arm’s length principle, set out in Article 34 of the UAE Corporate Tax Law, requires that transactions between related parties be priced as if they were carried out between two completely independent businesses operating under similar conditions. It applies to goods, services, financial transactions, intangibles, and any other arrangement between related parties or connected persons.
The FTA published its Transfer Pricing Guide (CTGTP1) in October 2023, which aligns the UAE framework closely with the OECD Transfer Pricing Guidelines. The burden of proof is on the taxpayer, not the FTA. If you can’t show that your pricing is at arm’s length, the FTA can step in, and that can become costly quickly.
The FTA recognises five transfer pricing methods in accordance with Article 34(3) of the UAE Corporate Tax Law and the OECD Guidelines. These are split into two categories.
Traditional transaction methods, which compare actual prices or margins directly:
Transactional profit methods, which look at net profitability rather than individual prices:
Note: Under Article 34(4), taxpayers may also use another method if none of the five can reliably determine the arm’s length price, but this requires comprehensive documentation and a strong economic rationale.
The FTA prefers that the most appropriate method is applied at the transactional level, meaning transaction by transaction rather than across the entity as a whole. The starting point is always a proper functional, assets, and risk (FAR) analysis, because the right method depends entirely on what your business does, what risks it bears, and what assets it uses.
The CUP method is the most straightforward of all the transfer pricing methods. It compares the price charged in a controlled transaction, one between related parties, to the price charged in a comparable transaction between independent parties under similar conditions.
For example: If your UAE entity sells crude oil to a group company in another country, and you also sell the same grade of crude oil to third-party buyers at USD 80 per barrel, that third-party price is your CUP. The related party price should match it.
The CUP method works best when:
You have reliable internal comparable transactions that closely mirror the controlled one. The challenge is comparability. Even small differences in quality, volume, contract terms, or geography can distort the comparison and require adjustments. When those differences cannot be reliably quantified, the CUP method loses credibility, and another method may serve you better.
The Cost-Plus Method starts from the direct and indirect costs incurred by the supplier in a controlled transaction, then adds a mark-up that reflects what an independent business performing similar functions would reasonably earn.
So, if your UAE entity manufactures components for a group company abroad, you add an appropriate mark-up to your production costs. That total, cost plus mark-up, becomes the arm’s length price.
The FTA’s TP Guide also notes that low-value-adding intra-group services such as routine administrative, HR, or IT support, can be charged at a safe harbour mark-up of 5% under certain conditions, consistent with Chapter VII of the OECD Guidelines.
This method suits situations where your UAE entity:
One practical challenge is defining the cost base consistently. The mark-up applied must also be benchmarked against what independent companies earn for similar functions, which means you need reliable comparables, not just an internal policy number.
The Resale Price Method works in the opposite direction from the Cost-Plus Method. Rather than building up costs, it starts from the price at which goods are sold to an independent customer, then deducts an appropriate gross margin to arrive at the arm’s length purchase price from the related supplier.
For example: A UAE-based distributor buys finished electronics from its parent company and resells them locally. If comparable independent distributors earn a gross margin of 25%, you deduct that from the local resale price to establish what the parent should have charged.
This method is appropriate when:
Reliability drops when the distributor adds meaningful value to the product, through branding, processing, or localisation. When the reseller’s functions become more complex, the Resale Price Method may not capture the full picture accurately.
The TNMM is actually the most widely used transfer pricing method, both in the UAE and worldwide. Rather than comparing prices or gross margins directly, it looks at the net profit margin that the tested party earns from a controlled transaction and benchmarks it against the net margins of comparable independent companies.
The net profit is measured against an appropriate base, this could be total costs, total revenue, or operating assets, depending on the entity’s functional profile. The resulting ratio is the profit level indicator (PLI), and it is tested against a range derived from comparable companies found in public databases.
The FTA confirms that the interquartile range is the appropriate approach for determining an arm’s length range under the TNMM. Any result that falls within that range is acceptable.
TNMM is the right choice when:
Because net margin databases, including publicly listed company financials, are far more accessible than exact price or gross margin data, the TNMM often ends up being the most practical option. The FTA does not favour any specific commercial database but expects the search for comparables to follow a clear geographic hierarchy: local comparables first, then regional, then international.
The Profit Split Method is fundamentally different from all the others. Instead of testing one party against independent comparables, it takes the combined profit from a controlled transaction and splits it between the related parties. This split is based on their respective contributions, the functions each performs, the risks each bear, and the assets each owns.
This makes it particularly relevant where both parties contribute something unique, and where it is genuinely impossible to benchmark either side independently against a comparable third party.
The Profit Split Method fits when:
This is the most complex of the transfer pricing methods to apply. It demands detailed analysis of each party’s genuine economic contributions and thorough documentation to justify the split chosen. The FTA, consistent with the OECD, does not encourage its use where simpler methods can produce a reliable result.
There is no fixed hierarchy under UAE rules, but the FTA’s TP Guide is clear: you must select the method that gives the most reliable measure of an arm’s length outcome, based on the specific facts of each transaction. That process looks like this:
Understand what your entity actually does. What functions does it perform? What assets does it use? What risks does it genuinely bear? The answers determine whether you are testing a routine entity or something more complex.
Commodities and standard goods lend themselves to CUP. Routine manufacturing and services align with Cost Plus. Distribution and resale point towards RPM. While routine entities where data is limited are typically tested under TNMM. Only where both parties carry unique value should the Profit Split Method be considered.
The best method in theory is useless without the comparables to support it. If reliable price data does not exist for CUP, a different method may be more appropriate in practice.
In the TP Disclosure Form, submitted as part of your corporate tax return, you must declare which transfer pricing method you used for each controlled transaction. The FTA expects you to explain why that method is the most appropriate one. If you cannot justify the choice, your return is exposed.
It is also worth knowing that in some situations, the FTA acknowledges that a single method may not be sufficient. Combining methods, for example, using TNMM alongside the Resale Price Method as a corroborative test, can lead to a more robust, defensible analysis.
The days of treating transfer pricing as a technical afterthought are over for UAE businesses. Businesses with annual revenue above AED 200 million, or part of an MNE Group with consolidated revenue above AED 3.15 billion, are required to maintain a Master File and Local File, submitted to the FTA within 30 days of request. Even those below these thresholds are still expected to apply the arm’s length principle and maintain evidence to back it up.
The most appropriate transfer pricing method is not merely the easiest one to apply. It is the one that best reflects the economic reality of what your business does and can be supported by real data, analysis, and reasoning.
If you are still trying to determine your transfer pricing analysis or are unsure of the types of transfer pricing methods that apply to your transactions, hiring a competent UAE tax professional such as Stratrich Consulting will save you a world of trouble down the road.
