- Business Setup
- Corporate Services
Advisory Services
Regulatory Services
Tax Services
Accounting Services
- Insights
- Who We Are
- Contact Us
Advisory Services
Regulatory Services
Tax Services
Accounting Services
Many businesses working with related entities, a subsidiary, a parent company or a sister entity, set up intercompany prices without much thought. There may be a management fee, an intercompany loan, and a service charge between group companies. What seems like an internal issue can turn into a significant tax concern in the UAE today.
Since the Federal Tax Authority began administering corporate tax, transfer pricing in accounting has become one of the most scrutinised areas of compliance. The FTA conducted over 93,000 inspection visits in 2024 alone. Its audit approach is data-driven, and inconsistencies in related-party transactions are one of its primary risk indicators. Businesses that have not addressed their transfer pricing positions are finding themselves under review.
The blog explains what transfer pricing in accounting means for UAE businesses, how the rules work, what documentation is required in 2026, and what practical steps your finance team should take.
Transfer pricing in accounting refers to the prices set for transactions between related parties, companies or individuals connected through ownership, control, or family relationships. These transactions include the sale of goods, provision of services, licensing of intellectual property, and intercompany loans.
The issue is not the transaction itself, it is the price. When two related companies set their own prices without an independent party involved, there is a natural risk that prices will be set to benefit the group rather than reflecting the commercial reality. Profits can be transferred to a lower-taxed entity, reducing the taxable income in the higher-taxed one.
To prevent this, the UAE Corporate Tax Law, specifically Articles 34 to 36 of Federal Decree-Law No. 47 of 2022, requires that all related-party transactions be priced on an arm’s length basis. This means the price must reflect what two independent, unrelated parties would agree to under similar commercial circumstances.
The arm’s length principle is not a UAE invention. It is the globally recognised standard under the OECD Transfer Pricing Guidelines, and the UAE has adopted it directly. The Federal Tax Authority published its Transfer Pricing Guide in October 2023, confirming full alignment with OECD principles. The obligation to prove arm’s-length pricing rests with the taxpayer, not the FTA.
One important point: if a business identifies that a related-party transaction was not priced at arm’s length and wishes to make a downward adjustment, one that reduces taxable income, that adjustment requires prior FTA approval. It cannot be applied unilaterally in the return.
The rules apply to any UAE business that transacts with a Related Party or a Connected Person, as defined under the Corporate Tax Law.
Related Parties include entities where one party holds 50% or more ownership or control of the other, and individuals connected up to the fourth degree of kinship. If two entities are both controlled by the same person or group, they are related parties to each other.
Connected Persons include directors, officers, and shareholders of a business, together with their related parties.
There is no minimum transaction size that excludes a business from the arm’s length requirement. Every controlled transaction must be priced appropriately. What changes based on size is the level of disclosure and documentation required, which is covered in the next section.
One group that often misreads the rules is Free Zone businesses. Qualifying Free Zone Persons benefit from a 0% corporate tax rate on qualifying income. But that benefit depends on maintaining arm’s length pricing on related-party transactions.
A Free Zone entity that cannot demonstrate arm’s length pricing risks losing its qualifying status altogether, along with the 0% rate.
The UAE operates a tiered system. The level of disclosure and documentation required increases with the size and complexity of the business. Here is how it works for 2026.
| Requirement | Trigger | Applicable Under |
| Transfer Pricing Disclosure Form (filed with Corporate Tax Return) | Total related-party transactions exceed AED 40 million AND any single transaction category exceeds AED 4 million | Federal Tax Authority – UAE Corporate Tax regime |
| Connected Person Disclosure | Aggregate payments or benefits to a single Connected Person exceed AED 500,000 | Federal Tax Authority |
| Local File | UAE entity revenue is AED 200 million or above | Federal Tax Authority (Transfer Pricing Documentation Rules) |
| Master File | Part of a multinational group with global consolidated revenue of AED 3.15 billion or above | Federal Tax Authority |
| Country-by-Country Report (CbCR) | Same AED 3.15 billion threshold – filed within 12 months of the group’s financial year end | Federal Tax Authority |
The Disclosure Form is submitted as part of the corporate tax return. For businesses with a December year end, the 2025 tax year return and the Disclosure Form is due by 30 September 2026. The Master File and Local File do not go with the return, but they must be ready and available to the FTA within 30 calendar days of any request.
Penalties for non-compliance range from AED 10,000 to AED 100,000, depending on the nature of the failure. Repeated failures attract higher penalties. Under the revised penalty framework introduced by Cabinet Decision No. 129 of 2025, effective April 2026, these consequences are more consistently enforced across all tax types.
In practice, applying arm’s length principle requires a comparability analysis of a structured process of identifying what independent parties would have agreed to in similar circumstances and comparing that to your intercompany price.
A practical example: a UAE parent company charges its subsidiary, a management fee of AED 600,000 per year for finance and HR support. To show this as arm’s length, the business needs to demonstrate what independent service providers charge for comparable services in comparable markets. If benchmarking data shows that similar services are typically priced between AED 900,000 and AED 1.3 million, the AED 600,000 fee falls outside the arm’s length range and would likely be adjusted by the FTA.
The analysis also involves a functional analysis, looking at what each entity actually does (the functions it performs, the assets it uses, and the risks it carries). A company that performs limited, routine functions should earn a limited, routine return. One that bears significant risk and uses valuable assets should earn more. Where the return does not match the functional reality, that is where transfer pricing problems arise.
Benchmarking data should be updated at a minimum every three years for a full study, with annual updates to the financials of comparable companies used in the analysis. The FTA expects this to be done on a timely basis, before the return is filed, not after.
The UAE follows the five methods set out in the OECD Guidelines, confirmed by the FTA’s Transfer Pricing Guide. The right method depends on the nature of the transaction and the data available.
| Method | How It Works | Best Used For |
|---|---|---|
| Comparable Uncontrolled Price (CUP) | Compares the intercompany price directly to a price agreed between independent parties for the same or similar transaction | Commodities, financial transactions (loans), royalties, and standard goods with observable market prices |
| Resale Price Method (RPM) | Works back from the price at which the product is sold to an independent customer, subtracting a standard gross margin | Distribution companies that buy and resell products without adding significant value |
| Cost Plus Method | Adds an arm’s length mark-up to the supplier’s actual cost base | Contract manufacturers, shared service centres, routine service providers |
| Transactional Net Margin Method (TNMM) | Compares the net operating margin of the tested party against independent companies with similar functions | Most common method for distributors, service providers, and routine-function entities where gross price comparables are unavailable |
| Profit Split Method | Divides the combined profit from a transaction between related parties based on each one’s relative contribution | Complex integrated operations, joint development of intangibles, highly interdependent entities where both parties add significant value |
TNMM is the most commonly used method in the UAE because reliable benchmarking data at the net margin level is readily accessible. The CUP method is the most direct but requires genuinely comparable third-party price data, which is not always available.
The method chosen must be documented and justified in the Local File. Applying a method that does not reflect the transaction’s actual economics or switching methods without explanation creates risk in an FTA review.
For businesses that meet the revenue thresholds, preparing these documents is a substantive task that requires time and proper planning.
The Master File gives the FTA a group-level picture. It covers the group’s overall business model, how value is created across the group, how intangible assets are owned and managed, how intercompany financing works, and what the group’s general transfer pricing policy is.
One exception: UAE-headquartered groups that have no business establishments outside the UAE do not need to prepare a Master File, but they still need a Local File.
The Local File focuses on the UAE entity specifically. It includes a functional analysis of the entity, what it does, what risks it bears, what assets it uses and details of each category of material related-party transaction. For each category, it explains which transfer pricing method was used, why that method was selected, and provides the benchmarking analysis that supports the arm’s length conclusion.
Both documents must be contemporaneous. This is not a formality, the FTA takes a clear position: documentation prepared after a request is made is far less compelling than documentation that was ready at the time the return was filed.
A business that cannot produce its Local File within 30 days of an FTA request, or that scrambles to prepare it at that point is in a significantly weaker position.
Transfer pricing in accounting works best when it is managed throughout the year not assembled at the last minute before filing. Here is what finance teams should be doing now:
Know exactly which transactions exist between connected entities, what they cover, and what the values are. This includes goods, services, loans, IP licenses, management fees, and any other arrangement between related parties.
If your total related-party transactions exceed AED 40 million, or payments to a Connected Person exceed AED 500,000, the Disclosure Form must be filed with your corporate tax return by 30 September 2026 (for December year-end businesses).
If your UAE revenue is AED 200 million or above, the Local File is mandatory. Even if it is not, preparing one in line with the OECD standard is best practice – it demonstrates the arm’s length position and protects against audit risk.
Contracts between related entities should reflect the actual functions, assets, and risks of each party. Agreements that are outdated, vague, or simply absent are a common trigger point in FTA reviews.
In December 2025, the FTA launched its APA programme. From 30 December 2025, businesses can apply for a Unilateral APA covering domestic controlled transactions, for example, transactions between a UAE mainland entity and a Free Zone entity subject to different tax rates. Cross-border Unilateral APAs are planned for 2026.
An APA is a formal agreement with the FTA that fixes the transfer pricing methodology for a transaction over a set period of three to five years. The application fee is AED 30,000, and once agreed, it is binding on both the FTA and the taxpayer – provided the agreed conditions are met.
When the FTA finds that related-party transactions were not priced at arm’s length, it adjusts the taxable income upward. The business pays more corporate tax, plus interest in the underpayment. Documentation failures attract additional penalties of AED 10,000 to AED 100,000.
For Free Zone businesses, the stakes are higher. Failing to meet arm’s length conditions does not just trigger a penalty; it can remove the Qualifying Free Zone Person status entirely, exposing all income to the standard 9% corporate tax rate rather than 0%.
Under Federal Decree-Law No. 17 of 2025, which came into force on 1 January 2026, the FTA now has broader audit powers and tighter procedural timelines.
Combined with its risk-based audit approach – already active in analysing discrepancies between VAT turnover and corporate tax revenue businesses with unexplained intercompany pricing are increasingly visible to the authority.
The FTA’s approach is not punitive for its own sake. It is structured to encourage voluntary compliance. But the window for getting documentation in order before a review begins is narrower in 2026 than it has ever been.
Transfer pricing in accounting is one of the most practically significant compliance responsibilities for UAE businesses today. The rules are logical price for your related-party transactions the way independent parties would, and document how you reached that pricing. But applying that logic correctly takes structured analysis, proper documentation, and consistent attention throughout the year.
The FTA’s audit activity is growing. Its data tools are more sophisticated. Its framework is more clearly defined. And with the APA programme now live, there are proactive steps businesses can take to reduce uncertainty before a review ever begins.
The best position to be in is one where your transfer pricing documentation is already prepared; your intercompany agreements reflect commercial reality, and your Disclosure Form accurately captures what your business does. If that is not where you are today, the time to address it is before your next filing deadline, not after the FTA makes contact.
