Related-Party Charges in the UAE: How Much Mark-Up Is ‘Too Much’ Under Transfer Pricing?
“How much is too much?” — that’s the question keeping many finance heads awake after the UAE rolled out its Corporate Tax and Transfer Pricing rules.
In a landscape where one misjudged related-party transaction can trigger scrutiny, understanding the Arm’s Length Principle (ALP) isn’t just smart — it’s survival. The UAE’s transfer pricing regime now expects every business, from family-run firms to free zone entities, to prove that their prices match what independent parties would charge.
The good news is that you don’t need to be a multinational giant to get it right. Even SMEs and free zone companies can use simple tools like benchmarking and FAR analysis to justify their mark-ups and avoid red flags.
At ADEPTS, we help businesses navigate the grey areas — where compliance meets commercial strategy. Whether it’s identifying qualifying transactions, preparing a Local File, or avoiding excessive mark-ups, our approach simplifies transfer pricing in UAE for real-world application.
Understanding Related-Party Transactions
Not every deal between companies is as simple as it looks. Some sit under the tax microscope, especially when they happen between connected parties. These are called related-party transactions.
Under UAE transfer pricing rules, related parties are companies or people linked through ownership or control. That could mean a parent and subsidiary, two firms owned by the same group, or even directors who hold enough power to influence decisions.
The law makes it clear. If your business provides intercompany services, loans, royalties, or the supply of goods and intangibles to a related party, the price has to follow the Arm’s Length Principle (ALP). In simple words, it should be the same price you’d charge an independent company in a fair market.
And it doesn’t matter if the deal crosses borders. A cross-border related-party transaction between a UAE company and its foreign branch still needs to meet the same transfer pricing in UAE standards. That’s where things get tricky because global compliance rules also come into play.
To stay on the safe side, every business needs proper records. The FTA can ask for proof that your prices are fair. That’s why companies prepare a Master File and a Local File showing how their prices align with the ALP and what benchmarks they used to support it.
The UAE transfer pricing framework is clear about one thing — if related parties set prices, they need to be fair, transparent, and backed by evidence.
Arm’s Length Principle and Mark-Up Determination
So how do you know if your pricing is fair?
That’s where the Arm’s Length Principle (ALP) comes in. It’s the heart of transfer pricing in UAE, built on the same idea used in the OECD guidelines. The rule is simple. When two related companies deal with each other, the price they set should be the same as what independent businesses would agree on.
Under UAE law, this principle isn’t just theory. The FTA expects every company to show how its related-party transactions meet this test. That means proving your mark-up isn’t random, but based on facts — what you do, what you own, and the risks you take.
This is where the FAR analysis helps. It stands for Functions, Assets, and Risks. You look at what each party contributes. Who performs the key functions? Who owns the assets? Who carries the risk? The answers shape the right level of profit or mark-up for each side.
UAE businesses also rely on benchmarking studies to check if their pricing fits the market. These studies compare your margins with comparables — real companies doing similar work under similar conditions. If your mark-up falls within that range, you’re usually in safe territory.
There’s also something called a safe harbor. It’s a comfort zone that allows minor pricing differences if they stay within a reasonable limit. But don’t take it for granted. The UAE transfer pricing framework still expects proof that your prices are in line with the ALP.
For low-risk support or routine back-office work, companies often apply smaller mark-ups. These are called low-value-adding services, and they’re usually tested with simpler benchmarks. Interactive benchmarking tools can make this process easier, especially for SMEs that don’t have large finance teams.
Transfer Pricing Methods Recognized in the UAE
Once you know how to judge a fair mark-up, the next step is choosing the right transfer pricing method. The UAE transfer pricing rules recognize five main methods. Each helps you test whether your related-party transactions meet the Arm’s Length Principle (ALP).
The first is the Comparable Uncontrolled Price (CUP) Method. It’s the most direct one. You simply compare the price you charge a related party with the price charged in a similar deal between independent companies. If the numbers line up, your pricing passes the test.
Next is the Resale Price Method (RPM). This applies when a company buys goods from a related party and resells them to someone else. You start with the resale price, subtract a normal gross margin, and what’s left should be your arm’s length cost.
The Cost-Plus Method (CPM) works differently. It’s common for service providers or manufacturers. You take your total cost and add a reasonable mark-up — one that matches market benchmarks or comparables.
Then comes the Transactional Net Margin Method (TNMM). This one focuses on net profit instead of price. You compare your operating margin with similar companies performing similar functions. It’s often used when you can’t find direct price comparisons.
Finally, there’s the Profit Split Method (PSM). This is used for complex cases where two related parties both make major contributions, like in joint ventures or when dealing with unique intangibles. You split the total profit based on each side’s role, assets, and risks.
Each method has its place. The key is to pick the one that fits your transaction best and to back it with solid benchmarking data and a clear FAR analysis. That’s what keeps your UAE transfer pricing documentation consistent and defensible if the FTA comes asking.
Determining Acceptable vs Excessive Mark-Up
Every company wants to earn a profit, but when it comes to related-party transactions, the question is — how much is too much?
The UAE transfer pricing framework doesn’t fix a single number for mark-ups. Instead, it relies on benchmarking and the Arm’s Length Principle (ALP) to find what’s fair. The idea is to see what independent companies charge in similar deals, then stay within that range.
Mark-ups depend on what kind of work you do, what risks you carry, and how much value you add. That’s where the FAR analysis comes in — looking at your functions, assets, and risks. A low-risk service might justify a 5% return, while a high-risk project or unique technology license might justify more.
Here’s a simple view of how different transactions often fall within reasonable ranges in transfer pricing in UAE:
| Transaction Type | Typical Arm’s Length Mark-Up Range |
|---|---|
| Low-value-adding services | 3% – 7% |
| Contract manufacturing | 7% – 12% |
| Distribution or resale activities | 5% – 10% |
| Technical or management services | 8% – 15% |
| Licensing or intangibles | 10% – 25% |
These ranges aren’t official “safe harbor” limits, but they’re common in benchmarking reports used in the UAE. The key is to prove, through data, that your rate sits comfortably inside the Arm’s Length zone.
Let’s make it real.
An SME providing admin support to its parent might use the Cost-Plus Method and apply a 6% mark-up. A free zone startup offering tech support could justify a slightly higher rate if it carries local operational risks. A multinational licensing its brand to a UAE subsidiary might charge 15%, backed by comparables from the same industry.
Problems start when a company pushes too far. If your mark-up suddenly jumps mid-year — say from 10% to 25% without a business reason, it may look like an excessive mark-up. That’s a red flag for the FTA, and it can lead to profit adjustments or tax penalties.
The trick is to stay consistent, stay documented, and keep your mark-ups backed by real market data.
Interaction with Other Taxes and Regulations
Transfer pricing doesn’t exist in a bubble. The way you price related-party transactions can ripple across other parts of your tax and reporting landscape.
Let’s start with VAT. If your company adjusts prices to meet the Arm’s Length Principle (ALP), that change can also affect the taxable value of supplies. A higher or lower mark-up might alter your VAT base, so it’s important to keep both systems aligned.
Then there’s Economic Substance Regulation (ESR). The ESR test looks at whether your company actually performs real business activities in the UAE. When the FTA reviews your transfer pricing documentation in UAE, it also checks if your profits reflect those real functions, assets, and risks — what we call the FAR analysis. If not, you could face ESR non-compliance issues.
Corporate tax audits are another area to watch. A transfer pricing adjustment can directly impact your taxable income. If the adjustment increases profits, it can change your corporate tax payable. That’s why companies need to maintain consistent figures between their UAE transfer pricing documentation, audited financials, and tax returns.
It doesn’t stop there. Banks and investors also pay attention. Significant pricing changes or excessive mark-ups might raise questions about transparency or financial stability. For businesses with bank covenants or investor agreements, consistent transfer pricing in UAE practices build confidence and avoid unnecessary red flags.
In short, one pricing change can touch everything — from VAT to audits to investor trust. The smarter approach is to treat transfer pricing as part of your broader compliance strategy, not an afterthought.
Documentation and Compliance Requirements
Getting your transfer pricing in UAE right isn’t just about numbers. It’s also about proof. The FTA expects every business that meets the thresholds to maintain detailed documentation. That includes a Master File, a Local File, and a Transfer Pricing Disclosure Form.
The Master File gives a big-picture view of your group — how it’s structured, where it operates, and how it makes money. The Local File zooms in on your UAE entity, showing specific related-party transactions, pricing policies, and benchmarking results. The Disclosure Form is a quick summary that gets filed with your corporate tax return, confirming which qualifying transactions took place during the year.
Being audit-ready means more than just having papers in a folder. The FTA can ask for your files anytime, usually within 30 days of a request. Missing information or inconsistencies can lead to penalties, and those fines can be steep. That’s why it helps to keep your records updated throughout the year — not just at tax season.
Deadlines matter too. The Local File and Master File are due at the same time as your corporate tax return. Late submission or errors can result in financial penalties and longer audits.
The good news? Technology makes this process easier. Many businesses now use automation tools, benchmarking calculators, and digital reporting platforms to prepare their transfer pricing data. These tools help check margins, flag risks, and keep the UAE transfer pricing documentation consistent.
When your data is clear, your mark-ups make sense, and your records are ready, compliance becomes simple — and that’s exactly what the FTA expects.
Common Mistakes and Compliance Risks
Even with the best intentions, businesses slip up on transfer pricing in the UAE more often than you’d think. The rules look simple, but the small details often trip people up.
Weak or Incorrect Benchmarking
This is one of the biggest problems. Some companies rely on outdated studies or pick comparables that don’t match their business model. Others skip benchmarking altogether. Without reliable data, it’s impossible to prove that your pricing follows the Arm’s Length Principle (ALP). If your margins look unrealistic, the FTA will question them right away.
Missing or Incomplete Documentation
Another major issue is poor record keeping. Many firms prepare their Master File and Local File too late, or miss key details like the FAR analysis. When the FTA asks for proof, they can’t show how their mark-ups were set. That lack of evidence alone can lead to adjustments or penalties.
Ignoring Economic Substance Requirements (ESR)
A lot of companies forget about ESR while focusing on UAE transfer pricing compliance. But the two go hand in hand. If you report high profits but have little real activity — no staff, minimal assets, or outsourced functions — you could fail the ESR test. The FTA expects the profits to match the functions and risks performed in the UAE.
Misclassifying Intercompany Services
Not all services are equal. Low-value-adding services such as basic admin or IT support usually justify smaller mark-ups. Charging 20% or more for these routine services can look like an excessive mark-up. That’s a red flag in any benchmarking review.
Crossing Thresholds Without Disclosure
Some companies forget to track the size of their related-party transactions. If the value crosses the reporting threshold and you don’t declare it in your transfer pricing documentation, that’s a compliance breach. The FTA takes missed disclosures seriously, even if the pricing itself is fine.
Mistakes like these are easy to avoid with early preparation and regular reviews. Consistent data, clear documentation, and the right support can save you from a lot of unwanted tax trouble.
Step-by-Step Guide to Assessing Related-Party Charges
Understanding how to evaluate related-party transactions doesn’t have to feel overwhelming. The process is straightforward once you know what to look for and how to document it properly.
Step 1: Identify Related-Party Transactions
Start by mapping out all your intercompany dealings. This includes management fees, shared services, royalties, loans, and cost allocations between branches or subsidiaries. Make sure each transaction is supported by an agreement that clearly defines the terms.
Step 2: Select the Appropriate Transfer Pricing Method
Next, decide which transfer pricing method fits the transaction type. For instance, a Cost-Plus Method (CPM) often works best for service charges, while a Comparable Uncontrolled Price (CUP) method may suit goods or financial transactions. The goal is to mirror what two independent companies would agree on in similar conditions.
Step 3: Conduct Benchmarking and FAR Analysis
Once the method is chosen, use benchmarking studies to find comparable businesses or transactions. Then perform a FAR analysis — identifying the key Functions, Assets, and Risks involved. This ensures that the mark-up or margin you apply truly reflects the economic value each entity adds.
Step 4: Apply Arm’s Length Adjustments and Document Results
After analyzing the data, make necessary adjustments so your pricing aligns with the Arm’s Length Principle (ALP). Document all findings in your Local File and Master File, including assumptions, comparables, and justifications. This documentation is what supports your position during a UAE transfer pricing review or audit.
Step 5: Regular Review and Compliance Updates
Finally, review your related-party charges at least once a year. Market conditions, business models, or FTA guidelines can change, and your transfer pricing policy should evolve with them. Update your documentation and recheck safe harbor margins to avoid penalties or disputes down the line.
ADEPTS Advisory Support
At ADEPTS, we make transfer pricing in UAE simple, practical, and stress-free. Our advisory team guides businesses through every stage — from choosing the right transfer pricing method to preparing strong benchmarking documentation that stands up to scrutiny. We help companies assess their risks, carry out detailed FAR analysis, and build compliance strategies aligned with UAE transfer pricing guidelines.
When an FTA audit or dispute arises, ADEPTS represents you with complete confidence. Our experts review your Master File and Local File, ensure your arm’s length position is defensible, and manage communication with authorities to reduce uncertainty and penalties.
For SMEs, we know compliance can feel overwhelming, so ADEPTS offers easy-to-use digital tools, simplified calculators, and transfer pricing documentation in UAE templates tailored for smaller setups. You get compliance without complexity — and strategy without the stress.
Conclusion
Getting related-party charges right isn’t just about avoiding penalties — it’s about building trust, transparency, and long-term sustainability in your business. With UAE transfer pricing rules now fully in play, every company, whether on the mainland or in a free zone, must prove that its pricing meets the Arm’s Length Principle (ALP).
The good news is that compliance doesn’t have to be complicated. By using proper benchmarking, maintaining your Master File and Local File, and reviewing your related-party transactions regularly, you can stay well within the acceptable range and focus on growth.
At ADEPTS, we believe smart compliance is smart business. Our goal is to help you manage transfer pricing in UAE with clarity and confidence — keeping your mark-ups fair, your documentation audit-ready, and your strategy future-proof.
FAQs:
Yes. Even if a company operates in a free zone, it must comply with UAE transfer pricing regulations when dealing with related-party transactions. The only difference is that certain Qualifying Transactions may enjoy tax benefits — but they still have to meet the Arm’s Length Principle (ALP).
The mark-up is based on market interest rates for similar loans between independent parties. Factors like loan term, risk, and currency exposure are considered to ensure the charge aligns with the arm’s length standard.
Yes, in many cases. The Federal Tax Authority (FTA) allows simplified approaches or safe harbor ranges for low-risk or low-value-adding services, especially for SMEs.
If your mark-ups exceed acceptable benchmarking ranges, adjustments can be made before filing your return. It’s best to document these changes immediately and disclose them in your Local File.
Each entity that meets the threshold must file its own TP Disclosure Form, even if it operates under a shared Master File. This ensures transparency in related-party transactions.
Yes. Any pricing adjustment between related parties may affect your VAT reporting if it changes the transaction value. Always align transfer pricing documentation in UAE with your VAT filings to stay compliant.
Yes, but only with valid justification. If the business model or transaction type changes, you can switch to another transfer pricing method as long as it better reflects the Arm’s Length Principle.
Not always. Small entities below the materiality thresholds may only need to submit a TP Disclosure Form, but keeping simplified records is still recommended for audit readiness.
Increasingly, yes. Banks often review transfer pricing documentation in UAE to assess financial transparency and ensure the borrower’s intercompany funding aligns with fair market terms.
They can be. Cross-border related-party transactions must meet both UAE and foreign transfer pricing requirements, which may include withholding taxes or additional reporting under OECD guidelines.
References
- 6. Transactions with Related Parties | CBUAE Rulebook.
https://rulebook.centralbank.ae/en/rulebook/6-transactions-related-parties - Corporate Tax.
https://u.ae/en/information-and-services/finance-and-investment/taxation/corporate-tax. - OECD Guidelines for Multinational Enterprises on Responsible Business Conduct.
https://www.oecd.org/en/publications/2023/06/oecd-guidelines-for-multinational-enterprises-on-responsible-business-conduct_a0b49990.html. - Transfer Pricing Guide Corporate Tax Guide | CTGTP1 October 2023.
https://tax.gov.ae/Datafolder/Files/Pdf/2023/Transfer%20Pricing%20Guide%20-%20EN%20-%2023%2010%202023.pdf. - ‘UAE Economic Substance Regulations | Ministry of Finance (MoF)’. Ministry of Finance – United Arab Emirates,
https://mof.gov.ae/en/public-finance/international-relations/economic-substance-regulations/.
