The United Arab Emirates (UAE) has historically been recognized as a global hub for trade, investment, and cross-border business. With a tax environment traditionally characterized by zero or minimal corporate taxation, businesses found the UAE an attractive jurisdiction for establishing regional headquarters and global investment holding structures.

However, the global tax landscape has undergone significant transformation in recent years. The introduction of the OECD Base Erosion and Profit Shifting (BEPS) Project, international calls for greater tax transparency, and the need to align with international standards have prompted the UAE to introduce a comprehensive Corporate Tax regime.

On 9 December 2022, the UAE Ministry of Finance (MoF) issued Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the Corporate Tax Law, or “CT Law”). For the first time in UAE history, this law incorporated dedicated Transfer Pricing (TP) provisions, formally embedding the Arm’s Length Principle into the UAE’s tax framework.

This marks a paradigm shift:

• Multinationals and domestic groups can no longer rely solely on simplified internal arrangements.
• Intercompany transactions are now subject to economic justification, benchmarking, and documentation requirements.
• Businesses must treat intra-group dealings with the same rigor as third-party transactions.

Oversight of these TP rules has been entrusted to the Federal Tax Authority (FTA), the body responsible for administering and enforcing compliance under the Corporate Tax regime.

Implementing appropriate transfer pricing policies has important benefits for multi-national companies

1. Intercompany Agreements Not Aligned with OECD or UAE Standards

Many UAE businesses still rely on informal or outdated intercompany arrangements. Agreements are either not documented, loosely drafted, or fail to meet the substance requirements under the OECD Transfer Pricing Guidelines.

• • For example, a cost-sharing arrangement may simply be invoiced without a written agreement.
  • Loan agreements often omit interest rate benchmarking or repayment terms.
  • Service agreements lack clarity on allocation keys, markups, or scope of services.

The Risk:

During an FTA audit, undocumented or poorly drafted agreements can be challenged as non-arm’s length, leading to:

• • Adjustments to taxable income.
  • Re-characterization of transactions (e.g., treating equity funding as a loan).
  • Penalties for non-compliance and damage to corporate reputation.

2. Lack of Benchmarking Support

Benchmarking is the backbone of transfer pricing compliance. However, many UAE taxpayers either:

• • Do not perform benchmarking at all.
  • Use internal comparisons that do not meet FTA or OECD requirements.
  • Lack access to renowned global databases like TP Catalyst, Orbis, RoyaltyStat.

The Risk:

Without reliable benchmarking:

• • Businesses cannot defend their margins, royalty rates, or interest rates.
  • The FTA may impose adjustments using external data, often unfavorable to the taxpayer.
  • Companies become vulnerable in cross-border disputes, risking double taxation.

3. Uncertainty Around Thresholds and Documentation Triggers

The UAE’s TP regime has multiple thresholds (AED 40m, AED 4m, AED 500k, AED 200m, AED 3.15bn). Many companies are unclear about when each applies, leading to under- or over-reporting.

The Risk:

• • Under-reporting: Failure to disclose transactions may result in non-compliance penalties.
  • Over-reporting: Companies may spend unnecessary time and resources preparing documentation when not required.
  • Audit exposure: The FTA can view inconsistencies in disclosure as deliberate non-compliance.

4. Complexity of Connected Person Rules

Article 36 of the CT Law introduced Connected Person provisions that go beyond traditional related party definitions. These include:

• • Founders, owners, and key decision-makers.
  • Relatives up to the fourth degree.
  • Individuals receiving salaries, allowances, or benefits.

The Risk:

• • Companies may overlook connected person transactions such as director salaries, housing allowances, or related family employment contracts.
  • Failure to justify these on an arm’s length basis can result in FTA challenges, even if the amounts are modest.

5. Exposure to Non-Compliance Penalties and Audit Risks

The FTA is expected to scrutinize TP documentation in high-risk industries (retail, finance, real estate, trading, oil & gas, professional services). Businesses that lack defensible TP policies are at risk of:

• • Significant financial penalties.
  • Retroactive tax adjustments.
  • Reputational damage as being non-compliant in an internationally regulated jurisdiction.