Transfer Pricing in the UAE: The Tax Rule Most SME Owners Have Never Heard Of
Picture this: you own two companies. Company A is a trading business in Dubai Mainland. Company B is a holding company in a UAE Free Zone. Company A buys goods from Company B at a price you set yourself — a price that, conveniently, keeps Company A’s profits low and Company B’s profits in the zero-tax Free Zone. It seems logical. It might even seem clever. But under UAE Corporate Tax law, it is potentially a serious compliance problem — and the Federal Tax Authority (FTA) has the tools to find it.
What Is Transfer Pricing?
Transfer pricing refers to the prices charged between related parties — companies under common ownership or control — for goods, services, loans, intellectual property, or any other transaction. The UAE’s Corporate Tax Law, aligned with OECD standards, requires that all transactions between related parties be conducted at arm’s length. This means the price charged must be the same as what two independent, unrelated parties would agree to in a comparable transaction.
Who Does This Affect?
- You own multiple companies that transact with each other
- Your UAE business buys from or sells to an overseas parent, subsidiary, or affiliate
- You have a family business structure where different family members own related entities
- Your UAE company provides management services to, or receives them from, a related entity
- Your UAE business has loans to or from related parties
The Documentation Requirement
The FTA requires businesses with related-party transactions above certain thresholds to maintain a Transfer Pricing Local File — a detailed document that describes the transactions, the parties involved, the pricing methodology used, and evidence that the prices are at arm’s length. The documentation must exist before you file your Corporate Tax return, not after the FTA asks for it.
The Most Common Transfer Pricing Errors
- Intercompany Loans Without Interest: Many business owners lend money between their companies without charging interest, or charge interest at rates that do not reflect market conditions.
- Management Fee Arrangements: If one entity provides management or support services to another, the fee charged must reflect the actual value of those services at market rates.
- Goods and Services Pricing: If Company A sells goods to Company B at a price significantly below or above market value, the FTA will question whether the pricing is genuinely arm’s length.
- Free Zone Profit Shifting: Using related-party transactions to shift profits into a Free Zone entity claiming the 0% rate is exactly the type of arrangement the FTA’s transfer pricing rules are designed to address.
We worked with a family-owned group that operated a manufacturing business in Sharjah and a trading company in a UAE Free Zone. The manufacturing company had been selling goods to the trading company at cost price for years. We conducted a benchmarking analysis, prepared the required transfer pricing documentation, and restructured the intercompany agreement — resulting in a compliant tax position and a defensible pricing methodology.
