Under the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022), transactions between related parties must adhere to the Arm’s Length Principle (ALP)—i.e., the pricing should be consistent with what would have been agreed between unrelated parties under similar circumstances.

What Are Related Party Transactions?

Under Federal Decree-Law No. 47 of 2022, related party transactions refer to business dealings between entities or individuals who are connected through ownership, control, or kinship. This includes:

• Transactions between group companies
• Dealings with shareholders or directors
• Cross-border transactions with foreign affiliates
• Transactions with close family members

Such transactions can include loans, management fees, goods or services provided, rent, and more.

What Is the Arm’s Length Principle?

The Arm’s Length Principle (ALP) requires that the pricing of transactions between related parties be the same as if they were unrelated parties in comparable circumstances.
This ensures that profits are not artificially shifted or underreported, particularly in cross-border structures or free zone businesses.

Why It Matters Under UAE Corporate Tax

If a related party transaction is not priced at arm’s length, the Federal Tax Authority (FTA) has the right to:

• Re-characterize the transaction
• Adjust the taxable income
• Impose penalties for non-compliance

Thus, proving that your related party transactions follow the ALP is crucial for protecting your business from unnecessary tax exposure.

How to Prove Arm’s Length Pricing

To demonstrate compliance, the following steps are recommended:

1. Use OECD-Approved Transfer Pricing Methods

The UAE follows OECD guidelines and accepts the following TP methods:

• Comparable Uncontrolled Price (CUP)
• Resale Price Method
• Cost Plus Method
• Transactional Net Margin Method (TNMM)
• Profit Split Method

Choose the most appropriate method based on the nature of your transaction.

2. Conduct a Benchmarking Study

To validate pricing, compare your transaction with:

• Publicly available market data
• Independent third-party transactions
• Industry standards or pricing databases

This ensures you can justify that your pricing is fair and commercially reasonable.

3. Maintain Proper Documentation

If your annual turnover exceeds AED 50 million, or you’re part of a multinational enterprise (MNE) with global revenue exceeding AED 3.15 billion, you’re required to prepare:

• A Local File (detailing UAE-related transactions)
• A Master File (providing a global overview of your group)

In all cases, you must submit a Transfer Pricing Disclosure Form with your CT return.
Ensure the treatment of intercompany transactions is consistent across all entities and jurisdictions (where applicable).

4. Ensure Substance and Consistency

Even with perfect pricing, if the economic substance isn’t there, you may face scrutiny. Ensure that:

• Related party agreements are in writing
• Services are actually rendered
• Payments match agreements
• Treatment is consistent across entities and tax jurisdictions

Non-Compliance Risk

Failure to apply Arm’s Length pricing may result in:

• Tax adjustments by the FTA
• Penalties
• Rejection of deductions or recharacterization of income