Transfer Pricing in the UAE, Methods and Documentation

Most UAE owner-managed groups are affected and do not know it. If you own two companies that invoice each other, this applies to you.

What the arm's length standard means

Article 34(2) puts it plainly. A transaction between related parties meets the standard if the result matches what unrelated parties would have reached in similar circumstances.

The test is the outcome, not the intention. A management fee set at a round number because it was convenient does not become arm's length by being consistent.

The five methods

Article 34(3) lists five.

1. Comparable uncontrolled price. What would a third party charge for the same thing?
2. Resale price. Work back from the price to the final customer, less a normal margin.
3. Cost plus. Cost of providing the service, plus a normal mark-up.
4. Transactional net margin. Compare the net margin earned against comparable independent businesses.
5. Transactional profit split. Divide the combined profit as independent parties would have.

Article 34(4) allows another method where you can demonstrate none of these reasonably applies. That is an argument you must be able to make, not a default.

Article 34(5) governs which to choose. The most reliable one, judged on contractual terms, characteristics of the transaction, economic circumstances, functions performed, assets employed, risks assumed, and business strategy.

The trap nobody expects: unpaid intercompany balances

This one catches ordinary UAE groups with no international structure at all.

The FTA's Transfer Pricing Guide sets it out. If a group has payment terms, and a related party does not settle within them, an extended credit period can be treated as a loan.

Their example uses a 90 day group policy where the balance ages past 400 days with no commercial rationale. The conclusion is that an arm's length interest rate should be charged on the balance beyond 90 days.

Read that against your own books. Intercompany balances that have sat unmoved for years are common in UAE groups, and they are now a transfer pricing exposure.

What you must document

Article 55 sets two levels.

The FTA can require a disclosure filed with your tax return covering transactions with related parties and connected persons.

Where your transactions meet conditions prescribed by the Minister, you must maintain both a master file and a local file. On request, you have 30 days to produce them.

Note the word maintain. These are not prepared after a request arrives. Thirty days is not enough time to build a transfer pricing file from nothing.

If the FTA disagrees with your pricing

Article 34(8) allows the FTA to adjust your taxable income to the arm's length result.

Article 34(10) then requires a corresponding adjustment to the related party's taxable income. Within a UAE group this can be broadly neutral. Across a border it usually is not.

What this article does not cover

Whether you meet the master file and local file conditions depends on the Ministerial Decision thresholds. Check your position rather than assuming you are below them.

Connected persons, meaning owners and their relatives, carry separate rules from related party companies.

This is general information on published law, not advice on your position.

A practical first step

List every transaction between companies you own. Management fees, shared staff, rent, loans, and unpaid balances.

For each, ask whether you could show a third party would have agreed the same terms. Where the answer is no, that is where to start.