{"id":25242,"date":"2026-03-06T06:25:00","date_gmt":"2026-03-06T06:25:00","guid":{"rendered":"https:\/\/stratrich.com\/ae\/?p=25242"},"modified":"2026-03-27T09:41:18","modified_gmt":"2026-03-27T09:41:18","slug":"transfer-pricing-methods-explained","status":"publish","type":"post","link":"https:\/\/stratrich.com\/ae\/insights\/transfer-pricing-methods-explained\/","title":{"rendered":"Transfer Pricing Methods Explained: When to Use Which One\u00a0\u00a0"},"content":{"rendered":"\n

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. <\/p>\n\n\n\n

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. <\/p>\n\n\n\n

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. <\/p>\n\n\n\n

What does the Arm’s Length Principle mean for UAE businesses? <\/h2>\n\n\n\n

Before exploring the methods, it is crucial to understand what each one aims to determine.  <\/p>\n\n\n\n

The arm’s length principle, set out in Article 34 of the UAE Corporate Tax<\/a> 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.  <\/p>\n\n\n\n

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. <\/p>\n\n\n\n

Which transfer pricing methods does the UAE recognise, and how are they grouped? <\/h2>\n\n\n\n

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. <\/p>\n\n\n\n

Traditional transaction methods, which compare actual prices or margins directly:<\/strong> <\/p>\n\n\n\n

    \n
  1. Comparable Uncontrolled Price (CUP) Method <\/li>\n<\/ol>\n\n\n\n
      \n
    1. Resale Price Method (RPM) <\/li>\n<\/ol>\n\n\n\n
        \n
      1. Cost Plus Method (CPM) <\/li>\n<\/ol>\n\n\n\n

        Transactional profit methods, which look at net profitability rather than individual prices:<\/strong> <\/p>\n\n\n\n

          \n
        1. Transactional Net Margin Method (TNMM) <\/li>\n<\/ol>\n\n\n\n
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          1. Profit Split Method (PSM) <\/li>\n<\/ol>\n\n\n\n

            <\/p>\n\n\n\n

            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.<\/em> <\/p>\n\n\n\n

            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. <\/p>\n\n\n\n

            When is the Comparable Uncontrolled Price (CUP) method the right fit? <\/h2>\n\n\n\n

            The CUP method is the most straightforward of all the transfer pricing<\/a> 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. <\/p>\n\n\n\n

            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. <\/p>\n\n\n\n

            The CUP method works best when: <\/strong><\/p>\n\n\n\n