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The introduction of corporate tax in the UAE has changed how businesses manage related party transactions. Now they must adhere to the arm’s length principle that can only be proved through proper documentation. Since 1 June 2023, companies must comply with the structured transfer pricing rules set out in Federal Decree-Law No. 47 of 2022.
The Federal Tax Authority expects businesses to prove that transactions between related entities reflect market value. Getting it wrong can lead to penalties, tax adjustments, and disputes with authorities.
This transfer pricing compliance checklist covers documentation requirements, thresholds, methods, penalties, and filing obligations.
The UAE follows a three-tier documentation structure based on transaction values and entity size. Additionally, the Arm’s Length Principle is applied universally. Article 34 of the Corporate Tax Law requires all transactions between related parties to match prices that independent parties would agree under comparable circumstances. This applies to every company, including those claiming small business relief. The only exception is entities within an FTA-approved tax group.
Transfer Pricing Disclosure Form (TPDF) becomes mandatory if the total value of related party transactions exceed AED 40 million in a tax period. Individual transaction categories must be detailed if they are exceeding AED 4 million. The TPDF requires disclosing which transfer pricing method you used and confirm arm’s length compliance.
Master File and Local File preparation is required to be prepared by UAE taxable persons if they meet either threshold under Ministerial Decision No. 97 of 2023.
Country-by-Country Reporting applies to groups with global consolidated revenue of at least AED 3.15 billion. File a CbC notification by year-end and submit the full report within 12 months. This follows Cabinet Resolution No. 44 of 2020.
Ministerial Decision No. 97 of 2023 details what goes into these files. Both files must be available for FTA submission within 30 days of request.
The Master File covers the multinational group structure, business descriptions including value drivers, intangible assets and ownership, intercompany financial arrangements, and consolidated financial statements. UAE-only groups without foreign operations do not need a Master File.
The Local File focusses on the UAE entity operations. Include business description, management structure, functional analysis showing your functions, assets and risks. Document every material-controlled transaction with amounts, transfer pricing method used, comparability analysis with supporting data and pricing justifications.
Prepare both files when finalizing accounts each year. The FTA expects documentation that informed pricing decisions, not analysis created afterward.
The FTA Transfer Pricing Guide issued in October 2023 recognises five OCED-aligned methods. Select the most appropriate method for each transaction type and document your reasoning.
This compares the price of your controlled transaction to prices in similar transactions that are not controlled. It works best if you have genuine comparable deals with independent parties or market data.
Suits distribution businesses. Start with resale price to independent customers, then deduct an appropriate gross margin reflecting your distribution function.
This applies to manufacturers and service providers. Take your production or service costs, then add a market-based markup. Requires finding comparable independent companies for reference.
Examines net profit margins. Compare your net profit margin from controlled transactions with those of similar independent companies. This approach is effective when detailed transaction comparables are limited.
Applies to highly integrated transactions where both parties make unique contributions. Divide combined profits based on each party’s relative contribution of functions, assets and risks.
Note: Document why you selected each method and why you rejected alternatives. Your method must produce the most reliable arm’s length result for your circumstances.
Article 55 of the Corporate Tax Law requires documentation beyond Master and Local Files. Keep all records for seven years.
Every material related party transaction needs written agreements specifying terms, pricing mechanisms, payment conditions, and responsibilities. Agreements must reflect actual business conduct. The FTA will compare contractual terms against your operations.
Maintain complete transaction records: invoices, payment records, bank statements, and accounting entries. These must reconcile with disclosure forms, financial statements, and transfer pricing files.
Keep detailed records of comparability searches, database outputs, filtering criteria, and calculations. Document the entire benchmarking process including search parameters, company selection, and arm’s length range calculations.
Retain emails on pricing decisions, meeting minutes about transfer pricing policies, and internal memos. These contemporaneous communications show real-time decision-making.
Cabinet Decision No. 75 of 2023 sets out administrative penalties for transfer pricing violations. These apply from 1st August 2023 and escalate for repeat offences.
Failing to maintain required transfer pricing records triggers a penalty of AED 10,000 for the first violation. This increases to AED 20,000 if you commit the same violation again within 24 months. The FTA can impose these penalties simply for lacking proper documentation when requested, without examining the substance of your transfer pricing positions.
Providing incorrect or incomplete information in your transfer pricing disclosure form carries a penalty of AED 500 for the first offence within 12 months. After the first 12 months, the penalty increases to AED 1,000 per month or part thereof. These amounts may seem modest, but the real cost comes from the detailed audits they invite.
These attract the most severe penalties under the regime. Missing the CbC notification deadline costs AED 1,000,000. Submitting the notification late brings an additional penalty of AED 10,000 per day, capped at AED 250,000. Filing inaccurate or incomplete CbC reports results in penalties ranging from AED 50,000 to AED 500,000.
When the FTA adjusts your taxable income due to transactions not being at arm’s length, you will owe interest on the underpaid tax. The rate is 14% per annum (calculated monthly) starting from the day after the due date. This applies until you pay the outstanding amount.
If your transfer pricing analysis shows you should report lower taxable income, you cannot simply include this adjustment in your tax return. You must obtain prior FTA approval before reducing your tax liability through transfer pricing adjustments. This prevents companies from making aggressive downward adjustments without scrutiny.
The Transfer Pricing Disclosure Form accompanies your annual corporate tax return. Starting preparation several months before the filing deadline ensure the related party transactions are documented clearly and aligned with Arm’s length principle.
Identify every related party and connected person. List all transaction types: goods, services, intellectual property, financing, and asset transfers. Calculate aggregate values for each category and amounts must match your financial statements.
Check if aggregate related party transactions exceed AED 40 million. If yes, complete the disclosure form. Then, check if individual transaction categories exceed AED 4 million. As, each category above this threshold needs separate disclosure with transfer pricing method details.
Values in your disclosure form must reconcile with audited financial statements, Local File, Master File, and internal accounts. Create reconciliation schedules explaining any differences.
For each disclosed transaction category, specify which of the five OECD methods you applied. Explain why this method provides the most reliable arm’s length result.
If benchmarking shows transactions fell outside the arm’s length range, calculate adjustments before auditors sign off your accounts. Adjustments reducing taxable income need prior FTA approval. While the adjustments increasing the taxable income can be included, but must it be documented.
If you operate as a Qualifying Free Zone Person, confirm in your tax return that related party transactions comply with arm’s length principle and that you have prepared required documentation.
Tax returns are due within nine months of year-end. Transfer pricing adjustments can affect audited accounts, so address these before the audit concludes. Build transfer pricing reviews into your year-end close process.
Transfer pricing compliance is now permanent in UAE corporate tax. Companies maintaining robust documentation and demonstrating genuine arm’s length pricing will navigate these requirements successfully. Those treating it as a paperwork exercise will face penalties and disputes with the FTA.
Transfer pricing compliance is very important for UAE businesses, with tough regulations, documentation, and consequences for non-compliance.
Plan your documentation in advance and maintain it for a period of at least seven years for FTA audit purposes. Employ robust systems and ensure consistency in reporting. Work with your finance, auditors, and advisors to align your transfer pricing with your accounts before finalising.
In addition to this, engage specialists such as Stratrich Consulting early to select methods, benchmark, and develop templates. The FTA enforces transfer pricing strictly, so following arm’s-length principles and maintaining good records builds trust and avoids penalties. Prioritise compliance using this transfer pricing compliance checklist for long-term business success or consult directly with a Stratrich’s tax advisor.
