Emergency Call 
Monday to Friday - 08:00 - 20:00
Why Transfer Pricing Applies to Far More Businesses Than Expected
"Transfer pricing" sounds like something only multinational corporations need to worry about.
But in the UAE, that's not necessarily the case.
If your business has related-party transactions, transfer pricing rules can apply, even if you're a small or medium-sized company with only one related entity.
A management fee between two commonly owned companies.
A loan from a shareholder.
A service fee paid to a related company.
Even certain payments made to owners or directors.
These transactions may need to follow the arm's length principle under UAE Corporate Tax rules.
The important distinction is this:
The transfer pricing requirement can apply broadly, but the documentation requirements depend on your size and transaction levels.
What Is the Arm's Length Principle?
The arm's length principle means related parties should transact as if they were independent businesses dealing with each other commercially.
In simple terms:
Would an unrelated company agree to the same price and terms?
If the answer is no, the arrangement may need to be reviewed.
This can apply to:
-
Management and consultancy fees
-
Intercompany loans
-
Shared costs and expenses
-
Royalties and licensing
-
Goods and services between related companies
-
Certain payments to connected persons
For example, if a UAE parent company charges its subsidiary AED 500,000 for "management services," there should be evidence that the services were actually provided and that the amount is commercially reasonable.
Related Parties vs Connected Persons: What's the Difference?
These terms are often used together, but they're not identical.
Related parties generally involve relationships created through ownership, control or certain family relationships.
Connected persons generally focus on individuals closely connected to the business, such as owners, directors and certain related individuals.
This distinction matters because different disclosure and documentation requirements can apply depending on the transaction and relationship.
If you're unsure whether a transaction falls within either category, it's better to assess it before filing rather than after an FTA review.
What Is the Transfer Pricing Disclosure Form?
Businesses crossing the relevant thresholds may need to submit a Transfer Pricing Disclosure Form alongside their UAE Corporate Tax Return.
The disclosure can require information such as:
-
Related-party details
-
Tax residency
-
Type of transaction
-
Transaction value
-
Transfer pricing method used
-
Relevant supporting information
The key point?
Having a related-party transaction doesn't automatically mean you need a Local File or Master File.
The documentation requirements depend on the applicable thresholds.
Do You Need a Local File or Master File?
For larger businesses and groups, the compliance requirements can go further.
A Local File provides detailed information about the UAE entity's related-party transactions and the economic basis supporting the pricing.
A Master File provides a broader picture of the multinational group's global business and transfer pricing policies.
So think of transfer pricing compliance as having different levels:
Related-party transaction → Arm's length pricing → Disclosure requirements → Local/Master File where applicable
Not every UAE business reaches the final stage.
But every business should make sure its related-party pricing is commercially defensible.
What Happens If Your Pricing Isn't at Arm's Length?
This is where transfer pricing becomes more than a paperwork exercise.
The FTA can review related-party transactions and request supporting documentation.
If a business cannot demonstrate that its pricing reflects the arm's length principle, the FTA may make adjustments to taxable income.
For example, an unexplained management fee or an inadequately supported related-party loan could attract scrutiny.
For Qualifying Free Zone Persons, the consequences can be even more significant because non-compliance with transfer pricing requirements can affect their ability to benefit from the Free Zone tax regime.
How to Get Your Transfer Pricing Documentation Right
Don't wait until the FTA asks for your documents.
A practical approach is to:
✔ Document related-party arrangements when they are created
✔ Keep written agreements for intercompany services and financing
✔ Maintain evidence that services were actually provided
✔ Use a consistent method for calculating management fees and cost recharges
✔ Review shareholder and director compensation for commercial reasonableness
✔ Keep transfer pricing documentation updated as the business changes
A simple agreement supported by proper records can make a significant difference during an FTA review.
A Simple Example
Imagine a UAE holding company charges its operating subsidiary an annual management fee.
Without documentation, the FTA could reasonably ask:
What services were provided? Why AED 300,000? How was the amount calculated?
With a proper service agreement, evidence of the work performed, and a commercially supported pricing methodology, the business has a much stronger position.
The transaction isn't necessarily the problem. The lack of evidence often is.
Transfer Pricing Isn't a One-Time Exercise
Your transfer pricing arrangements should evolve as your business does.
A structure that made commercial sense when your company was established may no longer reflect reality after:
-
Adding new subsidiaries
-
Changing ownership
-
Expanding internationally
-
Introducing new intercompany services
-
Changing shareholder financing
-
Restructuring operations
An annual transfer pricing review alongside your Corporate Tax compliance can help identify issues before they become problems.
How Evolve Tax Helps
At Evolve Tax, we help UAE businesses understand and manage their related-party obligations before they become an FTA problem.
Our services include:
-
Transfer pricing risk assessments
-
Related-party transaction reviews
-
Transfer Pricing Disclosure Form preparation
-
Transfer pricing policy development
-
Local File preparation
-
Master File preparation
-
Intercompany pricing reviews
-
Connected-person compensation reviews
Whether you're a small business with one related entity or part of a larger international group, we'll help you understand exactly what applies to you.
Is Your Related-Party Pricing Compliant?
Frequently Asked Questions
1. Does transfer pricing apply to a small UAE business?
Yes. The arm's length principle can apply to related-party transactions regardless of business size. However, specific disclosure and documentation requirements depend on applicable thresholds.
2. What is the arm's length principle?
It requires related-party transactions to be priced and structured as if the parties were independent businesses dealing under comparable commercial conditions.
3. What is a Transfer Pricing Disclosure Form?
It's a disclosure submitted with the Corporate Tax Return by businesses that meet the relevant conditions and thresholds, providing information about certain related-party and connected-person transactions.
4. Do Free Zone companies have to follow transfer pricing rules?
Yes. Free Zone businesses are also subject to UAE transfer pricing requirements. Non-compliance can have implications for businesses relying on Qualifying Free Zone Person status.
5. What happens if the FTA challenges my transfer pricing?
The FTA may review the transaction, request supporting documentation and make adjustments where the pricing does not satisfy the applicable arm's length requirements.
Conclusion: Don't Treat Transfer Pricing as a Multinational-Only Issue
Transfer pricing isn't just a concern for companies operating across multiple countries.
If your UAE business has a related company, shareholder loan, management fee, or other related-party arrangement, transfer pricing may already be part of your Corporate Tax compliance responsibilities.
The size of your business determines how much documentation you may need, but it doesn't remove the need to price transactions appropriately.
The smartest approach is simple: identify your related-party transactions, apply the arm's length principle, and keep the right evidence from the beginning.
Don't wait for an FTA request to discover that your documentation is incomplete.