Related-Party Transactions Under UAE Corporate Tax: Arm’s Length Rules Explained
Related-Party Transactions UAE Corporate Tax compliance has become one of the most critical areas of focus for businesses operating in the UAE since the introduction of Federal Decree-Law No. 47 of 2022. The UAE’s Corporate Tax (CT) regime, which came into effect for financial years beginning on or after 1 June 2023, introduced a comprehensive framework governing how businesses must handle transactions with connected or related parties. At its core, this framework is built on the internationally recognised arm’s length principle, a standard that ensures transactions between related parties are conducted as if they were between independent parties dealing at fair market value.
For multinational enterprises, family-owned conglomerates, free zone entities, and even small businesses with cross-ownership structures, understanding the arm’s length rules is no longer optional. It is a legal obligation that, if ignored, can result in significant tax adjustments, penalties, and reputational risks. This blog provides a thorough explanation of how related-party transactions are defined, regulated, and reported under UAE Corporate Tax law.
What Are Related-Party Transactions Under UAE Corporate Tax?
Under UAE Corporate Tax law, a “Related Party” is broadly defined under Article 35 of Federal Decree-Law No. 47 of 2022. The law identifies related parties as individuals or entities that share a specific relationship, whether through ownership, control, or family ties. This includes a natural person and a juridical person where that individual holds a 50% or more ownership interest, two juridical persons where a common shareholder holds 50% or more in each, individuals connected by family relationships up to the fourth degree, and partners in an unincorporated partnership, along with the partnership itself.
A “Connected Person” is a slightly narrower concept and refers to the owners, directors, officers of a taxable person, or their relatives. Transactions between a taxable person and its connected persons are also subject to the arm’s length standard, but additional provisions apply particularly when it comes to remuneration and benefits paid to these individuals.
The scope of what counts as a related-party transaction is wide. It can include the sale or purchase of goods, provision of services, licensing of intellectual property, lending and borrowing arrangements, guarantees, cost-sharing agreements, and any other arrangement where consideration is exchanged between related parties. Even transactions that appear routine on the surface, such as a parent company providing a loan to a subsidiary in the UAE, must be assessed against the arm’s length standard.
The Arm’s Length Principle: The Foundation of UAE Transfer Pricing Rules
The arm’s length principle is the cornerstone of the UAE’s approach to related-party transactions. Simply put, it requires that the price or terms of a transaction between related parties must be the same as or equivalent to what would have been agreed upon between two independent, unrelated parties under comparable circumstances in an open market.
The UAE has adopted this principle in alignment with the OECD Transfer Pricing Guidelines, which represent the global standard for evaluating intercompany transactions. The Federal Tax Authority (FTA) has made it clear that UAE businesses must apply internationally accepted transfer pricing methods to determine whether their related-party transactions comply with the arm’s length principle.
The OECD recognises five primary transfer pricing methods, each suitable for different types of transactions. The Comparable Uncontrolled Price (CUP) method compares the price charged in a controlled transaction to the price charged in a comparable uncontrolled transaction and is generally the most direct and reliable method when applicable. The Resale Price Method (RPM) works backwards from the resale price to a third party and deducts an appropriate gross margin to arrive at the arm’s length price for the inter-company purchase. The Cost Plus Method (CPM) starts with the costs incurred by a supplier in a controlled transaction and adds an appropriate markup. The Transactional Net Margin Method (TNMM) examines the net profit margin relative to an appropriate base, such as sales, costs, or assets, and is commonly used in UAE transfer pricing analyses due to its flexibility. Finally, the Profit Split Method (PSM) is used in cases where two or more related parties each contribute unique intangibles or share significant risks, and it splits the combined profits from the transaction in a manner that an independent enterprise would have agreed to.
Selecting the most appropriate method depends on the functional analysis of the entities involved, that is, the functions each party performs, the assets each employs, and the risks each bears. UAE businesses must conduct this analysis carefully and document it thoroughly.
Transfer Pricing Documentation Requirements in the UAE
One of the most significant practical implications of the UAE’s arm’s length rules is the documentation requirement. The UAE Corporate Tax law and the accompanying Ministerial Decisions set out specific documentation obligations that taxable persons must meet.
Businesses that meet or exceed the threshold of AED 200 million in revenue, or that are part of a multinational enterprise group with consolidated group revenues exceeding AED 3.15 billion (equivalent to EUR 750 million), are required to maintain a formal Transfer Pricing Master File and Local File. These documents must be prepared in line with OECD standards and must be made available to the FTA upon request.
The Master File provides a high-level overview of the multinational group’s global business, its transfer pricing policies, and its global allocation of income and economic activities. The Local File provides more detailed transactional information specific to the UAE entity, including a description of each material related-party transaction, the amounts involved, the transfer pricing method applied, and the benchmarking analysis supporting the arm’s length nature of the transaction.
Even businesses that fall below these thresholds are not exempt from the arm’s length obligation. All taxable persons must disclose their related-party transactions in the Corporate Tax Return using the Disclosure Form prescribed by the FTA. This disclosure captures the nature of the relationship, the type of transaction, and the aggregate value of transactions with each related party or connected person during the tax period.
Special Rules for Connected Persons: Salaries, Benefits, and Remuneration
The UAE CT law places particular scrutiny on transactions between a taxable person and its connected persons, specifically, the payments made to owners, directors, and key management personnel. Under Article 36, the deductibility of remuneration and benefits paid to connected persons is subject to the condition that such amounts reflect the market value of the services actually rendered.
This means that if a sole proprietor or a shareholder pays themselves a salary that is significantly above what an independent person performing the same role would earn in the open market, the excess amount may not be deductible for Corporate Tax purposes. The FTA expects businesses to benchmark such payments against comparable market data to justify the amounts claimed as deductible expenses.
This provision is particularly important for family businesses and owner-managed enterprises in the UAE, which are common across sectors such as trading, real estate, and professional services. Business owners must review existing remuneration structures and ensure they can support the arm’s length nature of payments made to family members or co-owners serving in executive or managerial roles.
Exemptions and Simplifications: Qualifying Group Relief
While the arm’s length rules apply broadly, the UAE CT regime does offer certain reliefs. Where a taxable person is a member of a Qualifying Group, a group of UAE resident juridical persons under common ownership of 75% or more, transactions between group members may be eligible for transfer pricing relief in certain circumstances. Intra-group transactions that qualify may be treated at their tax book value rather than fair market value for asset transfers and business restructurings, preventing immediate tax triggers on inter-company dealings.
However, this relief does not eliminate the documentation and disclosure obligations. Businesses must still demonstrate that transactions qualify for group relief and maintain appropriate records.
Consequences of Non-Compliance
Failure to comply with the arm’s length rules can have serious consequences for UAE businesses. The FTA has broad powers to make adjustments to the taxable income of a business if it determines that related-party transactions were not conducted at arm’s length. This means the FTA can impute arm’s length prices, disallow deductions, or include additional income — all of which increase the Corporate Tax liability of the business.
In addition to tax adjustments, the UAE CT law imposes administrative penalties for failure to maintain required documentation, failure to submit the required disclosures, and providing inaccurate information. These penalties can be substantial and can accumulate over time if non-compliance is sustained.
From a reputational standpoint, businesses found to have engaged in aggressive tax avoidance through related-party transactions may also face increased scrutiny in future tax periods, making it all the more important to establish robust compliance processes from the outset.
Practical Steps for UAE Businesses
To ensure compliance with the arm’s length rules under UAE Corporate Tax, businesses should begin by mapping all their related-party relationships and transactions comprehensively. This involves identifying every entity or individual that qualifies as a related party or connected person and cataloguing the nature and value of all transactions with them during each tax period.
Next, businesses should conduct a functional analysis for each material transaction type to determine which transfer pricing method is most appropriate. Benchmark studies should then be performed using reliable databases of comparable independent transactions or companies to support the arm’s length pricing.
Documentation must be prepared and maintained on an ongoing basis, not simply assembled at the end of the year. This is because the OECD and UAE standards require contemporaneous documentation, meaning the analysis should reflect the situation at the time the transaction was entered into, not reconstructed after the fact.
Finally, businesses should ensure that the Corporate Tax Return and associated Disclosure Form accurately capture all related-party transaction information. Any discrepancies between the disclosure and the underlying documentation can attract FTA scrutiny.
About My Taxman
Navigating the complexities of Related-Party Transactions under UAE Corporate Tax can be overwhelming, especially for businesses that are new to formal transfer pricing obligations. My Taxman is a specialist UAE tax advisory firm dedicated to helping businesses of all sizes achieve full compliance with UAE Corporate Tax law, including transfer pricing and arm’s length documentation requirements.
Our experienced team of tax professionals understands the nuances of UAE CT legislation, the expectations of the Federal Tax Authority, and the OECD standards that underpin the arm’s length framework. Whether you need a comprehensive transfer pricing policy, a benchmarking study, Master File and Local File preparation, or simply guidance on how to disclose related-party transactions in your Corporate Tax Return, My Taxman is here to help.
We work closely with family businesses, multinational subsidiaries, free zone entities, and SMEs across the UAE to put in place practical, commercially sound transfer pricing solutions that stand up to regulatory scrutiny. Reach out to My Taxman today and let our experts help you stay compliant, avoid penalties, and manage your tax position with confidence.
