Transfer Pricing: A Comprehensive Guide
So, what is UAE transfer pricing? It’s basically the price that companies within the same group charge each other when they buy or sell things—like goods, services, or even use of a brand name. The idea is to keep things fair and make sure those prices match what unrelated companies would charge in similar situations.
Why does this matter? Well, following the UAE transfer pricing rules helps businesses avoid trouble, like audits or big fines. It also shows that you’re running things properly and staying transparent with your taxes.
In this blog, we’ll walk you through what UAE transfer pricing is all about. We’ll also explain why things like benchmarking analysis, transfer pricing and proper paperwork matter.
Understanding the Basics of UAE Transfer Pricing
What is Transfer Pricing?
Let’s look at the meaning of the term transfer pricing. [Transfer pricing] is when two companies that are part of the same group—like a parent company and its subsidiary—buy or sell things from each other. It could be products, services, or even using each other’s brand name.
Even though these companies are connected, the law says they have to deal with each other as if they’re not. This is called the arm’s length principle. It means the prices they use should be the same as if the deal was happening between two completely separate businesses.
For example, a company in the UAE makes mobile phone covers. It sells some of those covers to its parent company in another country. The UAE company has to charge a price that’s close to what it would charge a normal, unrelated customer—not too high, not too low. This way, both companies report fair profits and pay the right amount of tax in their countries.
Who needs to comply?
If your company does business with related parties—like group companies, subsidiaries, or sister companies—then UAE transfer pricing rules apply to you, no matter how big or small your business is.
But when it comes to keeping special documents (called a Master File and Local File), there are specific conditions:
- You need to prepare a Local File if:
- Your business has AED 200 million or more in annual revenue, OR
- You’re part of a group that earns AED 3.15 billion or more globally (based on the group’s consolidated financial statements).
- A Master File must be prepared by the group if it crosses the AED 3.15 billion global threshold.
These rules often affect:
- Free zone companies that trade with related parties, inside or outside the UAE
- Multinational groups with branches or companies in other countries
- Family-owned groups where multiple businesses are under the same ownership
So, if your company is part of a group and regularly does business with related companies, you must follow transfer pricing rules, and you may also need to keep the required documentation.
Key Legislation and Guidelines
So, where do these rules come from?
Corporate Tax Law Federal Decree-Law No. 47 of 2022 explains the main law for UAE transfer pricing. It explains how related companies should set prices when doing business with each other. Cabinet Decision No. 44 of 2020 also talks about rules for Country-by-Country Reporting.
The UAE Ministry of Finance gives official guidance and updates to help businesses understand and follow the UAE transfer pricing rules. These updates are shared on their website.
The UAE also follows the OECD transfer pricing guidelines. This means companies need to use international best practices when setting prices between related parties.
Moreover, the Ministry of Finance also provides constant updates and guidance. The main aim is to assist the businesses and understand the UAE transfer pricing rules better like;
- when you need to have documentation,
- how to apply the arm’s length principle,
- and what kind of records to keep.
This is why the companies should stay updated on their announcements for any new clarifications.
Apart from this, the UAE follows the OECD Transfer Pricing Guidelines, which are widely used around the world. These guidelines explain how to set fair prices between related companies and how to document everything properly. By aligning with the OECD rules, the UAE is showing that it’s serious about transparency and fair taxation—just like many other countries.
The Arm's Length Principle
Let’s understand the Arm’s Length Principle in a little detail. Here are the different methods to check if your transfer pricing is fair or not.
Comparable Uncontrolled Price (CUP) Method
Comparable Uncontrolled Price (CUP) is a way to check if your UAE transfer pricing is fair or not.
In this method, you compare the price charged in a deal between two related companies to the price charged in a similar deal between two companies that aren’t related. If the prices are more or less the same, you’re good. If they’re too high or too low, it might raise a red flag.
Strengths:
- It is direct and easy to understand.
- If you find a close match, it gives a strong case that your pricing is fair.
Weaknesses:
- It may be hard to find an exact comparison as the product, terms or conditions may not be the same.
- Even small differences of volume or location can make the comparison tricky.
For example, a UAE-based company sells mobile phones to its sister company in another country. The CUP method would mean comparing that price to what the same company charges independent customers in the UAE for the same phones. If the prices match, the charged prices are fair.
Cost Plus Method
The Cost Plus Method is another way to check if your transfer pricing is fair.
In this method, you start with the actual cost of making a product or providing a service. Then, you add a profit margin that is similar to what an independent company would charge in a similar situation. This gives you the final price you charge your related party.
It works best when:
- You’re in manufacturing and selling goods to a related company.
- You’re offering services, like IT, logistics, or admin support, to a group company.
For example,a UAE company is providing IT support to its parent company abroad.
- The cost of the IT service is AED 100,000.
- Common profit margin in the market is 10%.
- Therefore, the final price would be AED 100,000 + 10% = AED 110,000.
That’s your benchmarking analysis transfer pricing—using the cost plus approach.
Resale Price Method
The Resale Price Method works a little differently. Instead of starting with the cost, you work backwards from the price at which a product is resold to an independent customer.
Here’s how it goes:
- Start with the final selling price—what the product is sold for to an independent customer outside the group.
- Then, subtract a gross profit margin that is similar to what an independent reseller would earn for doing their part (like storage, marketing, delivery, etc.).
- What’s left is the arm’s length price that should have been paid to the related party who originally sold the product.
Let’s say a UAE-based distributor buys electronics from its parent company abroad and sells them locally.
- The selling price to independent customers is AED 1,000 per unit.
- Gross profit margin for distributors in this industry is generally 25%.
- AED 1,000 – 25% = AED 750.
That AED 750 would be considered the arm’s length purchase price from the parent company, according to the resale price method.
Transactional Net Margin Method (TNMM)
The Transactional Net Margin Method, is about looking at net profit instead of gross profit.
Instead of focusing on the price of a single product or service, TNMM checks if your company’s overall profit margin is in line with what similar independent businesses are earning. It compares your net profit (after expenses) to something like sales, costs, or assets.
This method is really helpful when you don’t have detailed data about individual transactions or gross margins—especially for service providers or businesses with lots of operating costs.
Let’s say a UAE-based marketing company is providing services to a related party abroad.
- You check the net profit margin of your business—maybe it’s 12%.
- Then, you compare that to other independent marketing companies in the same region.
- If they’re earning between 10% to 14%, you’re within range. That means your pricing is likely in line with the arm’s length principle
That’s how benchmarking study transfer pricing works using TNMM—you’re checking if your profits are normal compared to others in the market.
Profit Split Method (PSM)
The Profit Split Method, or PSM, is used when two or more related companies are working closely together—like they’re part of the same team.
Instead of treating their work separately, PSM looks at the total combined profits from their joint activity and then splits those profits based on how much each one contributed.
This method is great when:
- The companies are highly integrated,
- Or they’re dealing with unique things like intellectual property or software,
- And it’s hard to figure out who should charge what.
Let’s say a UAE tech company and its related company abroad are working together to develop a new app.
- One team handles design, the other does the coding.
- The app is launched and earns AED 1 million in profit.
- They don’t invoice each other—they just split the profit based on their contributions.
- Maybe the UAE team did 60% of the work, so they get 60% of the profits.
That’s how transfer pricing works under PSM—it’s all about dividing the profits fairly, based on what each company brings to the table.
Strategic Transfer Pricing Implications
UAE Transfer pricing isn’t just about staying compliant, it can also be a smart business tool if used right.
1. Impact on Supply Chains
UAE Transfer pricing decisions affect how goods and services move within your group. If you set prices without thinking of the full picture, you might end up paying more tax in one country and less in another—causing issues down the road.
So, it’s important to plan your pricing to keep the supply chain efficient and tax-smart.
2. Entity Structuring
How your group is set up—whether you’re working through a free zone entity, a mainland office, or several subsidiaries—can change how UAE transfer pricing rules apply to you. The way you structure your entities can open or close doors in terms of tax benefits, especially under the benchmarking analysis transfer pricing approach.
3. Value Chain Planning
By looking at your entire value chain, you can use benchmarking transfer pricing to make sure each entity in the group is earning a fair share based on what they actually do. This kind of planning helps prevent any part of the business from being over- or under-compensated.
4. Aligning with Global Tax Planning
Benchmark analysis transfer pricing isn’t just a local matter. If you’re part of a multinational group, you’ll want your UAE transfer pricing documentation to match your global tax strategy. That way, you’re covered in every country where your group operates.
5. Preventing Future Disputes
When your pricing is backed by a solid benchmarking study transfer pricing, you’re less likely to face questions or penalties from tax authorities. It’s a proactive step that keeps your business on the safe side of the law.
Documentation Requirements: Transfer Pricing Report and Master File
Here are the documentations required
Transfer Pricing Report
The Transfer Pricing Report is an important document that proves your business is following the UAE transfer pricing rules correctly. It shows the Federal Tax Authority (FTA) that you’ve charged fair prices in related-party transactions, chosen the right benchmarking analysis transfer pricing method, and stayed aligned with the arm’s length principle.
This report includes key details like:
- Basic company information
- A list of all related-party transactions
- The UAE transfer pricing method used (such as CUP or TNMM)
- A well-done benchmark study transfer pricing
- Financial data explaining how the prices were set
Although you don’t need to submit this report when filing your tax return, it must be ready by the deadline in case the FTA asks for it.
Master File and Local File
Alongside the report, some businesses also need to prepare a Master File and a Local File.
The Master File gives a high-level overview of your entire multinational group. It covers global operations, business activities, and the group’s overall UAE transfer pricing policies.
The Local File focuses specifically on your UAE entity. It includes the details of your related-party transactions, the transfer pricing methods used, and the financial logic behind those prices.
You must prepare these files if your UAE business has revenue of AED 200 million or more in a financial year.
Country-by-Country (CbC) Reporting
CbC Reporting is for large multinational groups. It helps tax authorities around the world exchange key financial information to make sure taxes are being paid where the value is actually created.
If your group’s total revenue is more than AED 3.15 billion in a financial year, you’ll need to submit a CbC Report. This report includes:
- Revenue earned
- Profit before tax
- Number of employees
- Taxes paid in each country the group operates in
It gives tax authorities a clearer picture of how your business operates across borders.
Technology and Automation in TP Compliance
Technology is making UAE transfer pricing compliance a lot more easier and accurate. Many companies are utilising multiple software tools to automate the generation of Transfer Pricing Reports and make benchmarking analysis transfer pricing with minimum manual work. These tools also work with ERP systems, which allows businesses to track related-party transactions and pricing in real time.
By automating the process, companies reduce human errors, save on time, and respond to compliance needs. Moreover, data analytics allows easy assessment of transfer pricing risks by scoring transactions based on how likely they are to draw attention from tax authorities. This makes it easier for businesses to spot and fix potential issues before they become a problem.
Sector-Specific Transfer Pricing Considerations in the UAE
Different industries in the UAE face different transfer pricing challenges.
Logistics
In the logistics sector, UAE transfer pricing often involves freight mark-ups and warehousing services provided between related companies. These prices need to be fair—just like if the businesses weren’t connected.
Tech and IP
In the tech and intellectual property (IP) space, transfer pricing usually covers royalties, licensing fees, and platform or software sharing. The charges should match what unrelated companies would typically agree on.
Professional Services
For professional service firms, cross-border project staffing is common. If one company sends employees to help another within the group, cost-sharing must be handled correctly to reflect real market value.
Manufacturing
In manufacturing, knowing the difference between contract manufacturing and toll manufacturing is important. Both involve producing goods for a related party, and UAE transfer pricing rules help decide how profits should be shared based on who does what.
Internal Controls and Risk Management
Transfer pricing involves difficult calculations, and that is why having strong internal control in place is important to manage the risks.
Integrating TP into Corporate Governance
Having a strong systematic internal control ensures that transfer pricing practices are being followed. It is important to add TP checks into your company’s overall governance processes and internal audits to catch potential issues early.
Training Finance Teams
Training the finance teams helps identify and minimize any transfer pricing risks. With the right knowledge, they can spot issues before they become significant problems, ensuring the company stays on track.
Developing a TP Risk Scoring Matrix
A TP risk scoring matrix helps prioritize and address risks based on their severity. This tool helps companies identify which issues need immediate attention and where resources should be focused.
Practical Steps for Ensuring Compliance
To stay compliant with transfer pricing rules, businesses should follow a few simple steps.
Conduct a Transfer Pricing Risk Assessment
To conduct the transfer pricing risk assessment, the businesses firstly have to identify high-risk transactions. This is done by checking the intercompany agreements to ensure they match the actual practices between related companies. If the agreements don’t match reality, it could be a problem. It’s also important to do benchmarking studies to compare prices with market rates and make sure they follow the arm’s length principle.
Develop a Transfer Pricing Policy
Having a written transfer pricing policy is an important step to ensure compliance as it is a constant reminder for the employees. In fact it shows that a company is committed to staying compliant with the rules.
A good policy should include:
- The method being used for transfer pricing
- Clear pricing guidelines to ensure the prices are fair
- Clear roles and responsibilities for the involved employees
Moreover, it is important to regularly review and update the policy to keep it aligned with any changes in laws or business practices.
Maintain Proper Documentation
Keeping detailed records is a must for UAE transfer pricing compliance. These records help prove that your transactions follow the arm’s length principle.
Organizing all your documents neatly ensures that if there’s an audit, everything is easy to find and ready to show.
You can also use tech tools to help. Many companies use software to automate their documentation and keep everything up to date with less effort.
Visualize the TP lifecycle
- Start by identifying all related-party transactions. Choose the right transfer pricing method and set up intercompany agreements.
- Apply the selected method to set fair prices for goods, services, or intangibles exchanged between group entities.
- Check if your prices match what independent parties would charge. This usually involves a [benchmarking study].
- Prepare the Transfer Pricing Report, Master File, and Local File to prove you followed the rules. Keep everything documented.
- Be ready to explain and justify your pricing if the tax authority asks. Your documentation and analysis should support your case.
Penalties for Non-Compliance and Dispute Resolution
Not following UAE transfer pricing rules can lead to serious consequences.
Penalties for Non-Compliance
Transfer pricing is not something you can afford to take lightly. If your company fails to follow the rules, there are real consequences.
Missing documentation deadlines? Using the wrong pricing methods? Not keeping records at all? These things can lead to hefty fines. And it doesn’t stop at fines. Non-compliance can hurt your reputation too. It signals to regulators and partners that your business isn’t in control. That’s not a message you want to send.
Dispute Resolution Mechanisms
Having UAE transfer pricing problems may result in serious disputes with tax authorities. Hence you should know your options if something goes wrong.
- Mutual Agreement Procedure (MAP)
This lets tax authorities from different countries talk to each other and come up with a solution. It helps you avoid paying double taxes on the same income.
2. Advance Pricing Agreement (APA).
This is a deal you make with the tax authority ahead of time. You both agree on how to set your transfer prices for certain transactions. It gives you clarity and reduces the chance of future problems.
It’s also a good idea to talk to a tax advisor early. Getting the right advice at the start can help you avoid mistakes, stay compliant, and handle any disputes with confidence.
Conclusion
UAE transfer pricing regulations are detailed and require serious attention. It is important to be clear on the arm’s length principle and prepare the right documents. Every step plays a role in proving compliance. Non-compliance with the rules, can cause penalties, audits, and even reputational damage.
As the UAE continues aligning with global tax standards, staying informed and proactive is more important than ever. So, don’t wait for a tax notice to start taking action. Stay updated on the latest changes, review your transfer pricing policies regularly, and seek professional guidance when needed.
And If you still need help with your UAE transfer pricing compliance, then Adpets is here to support you every step of the way.
FAQs:
Transfer pricing planning helps allocate profits in a way that complies with local tax regulations when entering new markets. By using methods like benchmarking analysis transfer pricing, businesses ensure that intercompany transactions are priced at arm’s length, avoiding tax issues and optimizing cross-border operations.
Intercompany financing in UAE transfer pricing ensures that loans, interest rates, and guarantees reflect market conditions and the arm’s length principle. Benchmarking transfer pricing helps determine the appropriate terms for intercompany financing to maintain compliance with local regulations.
A business may be under scrutiny if the tax authorities notice discrepancies in pricing or documentation. To prevent this, businesses should conduct regular benchmark studies transfer pricing to ensure their methods align with the UAE transfer pricing rules.
Technology streamlines the UAE transfer pricing process by automating documentation and ensuring real-time compliance with local regulations. Using software for benchmarking transfer pricing and maintaining proper records reduces errors and ensures alignment with the UAE transfer pricing guidelines.
Cost-sharing arrangements under UAE TP rules must reflect each company’s contribution fairly and align with the arm’s length principle. A detailed benchmarking study transfer pricing ensures that cost allocation is consistent with market practices and compliant with local regulations.
Multilateral APAs include more than two countries, while bilateral APAs only include two. The UAE’s transfer pricing rules allow multilateral APAs, helping businesses follow global tax rules and feel more confident about their international deals.
Red flags include
- significant discrepancies between intercompany prices and market rates,
- incomplete documentation,
- and low-profit margins.
Regular benchmarking studies transfer pricing can help identify issues early and ensure compliance with the UAE transfer pricing rules.
Transfer pricing helps decide the right price for buying and selling between companies in different countries. This affects how much VAT and customs tax is paid. In the UAE, using correct transfer prices makes sure the prices match market rates, so there are no problems with VAT or customs.
At year-end, businesses should compare actual results with arm’s length prices and make adjustments if necessary. These adjustments should be documented and justified through a benchmark study transfer pricing to ensure compliance with UAE transfer pricing regulations.
Losses in group entities can raise questions about pricing practices and profit allocation. Using benchmarking analysis transfer pricing helps ensure that the allocation of losses is consistent with the arm’s length principle, as per UAE transfer pricing rules.
Reference
- CABINET RESOLUTION NO (44) OF 2020 ORGANISING REPORTS SUBMITTED BY MULTINATIONAL COMPANIES. https://mof.gov.ae/wp-content/uploads/2022/08/CabinetDecisionno44of2020onMultinationalCompanies.pdf.
- Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. https://mof.gov.ae/wp-content/uploads/2022/12/Federal-Decree-Law-No.-47-of-2022-EN.pdf.
- Ministry of Finance UAE. https://mof.gov.ae.
- Transfer Pricing Guide. https://tax.gov.ae/Datafolder/Files/Pdf/2023/Transfer%20Pricing%20Guide%20-%20EN%20-%2023%2010%202023.pdf.
