UAE Related Party Transactions: What Triggers Transfer Pricing Rules in 2025?

Last week, One of Our Client received a confusing letter from his tax advisor about UAE related party transactions and transfer pricing compliance. Like many business owners across the Emirates, he had no idea what these new rules meant for his trading company. The UAE introduced comprehensive transfer pricing regulations in 2023 that changed everything. Now, every business dealing with related companies or family members must follow specific rules. These aren’t just suggestions – they’re legal requirements with serious penalties.

If you’re confused about UAE transfer pricing rules like he was, this guide will help. We will be using real examples to explain everything in easily digestible terms. By the end of it all, you will know what applies to your business and what you need to do.

Evolution of Transfer Pricing Compliance Globally

Transfer pricing rules didn’t start in the UAE. Countries around the world have been using these rules for decades to make sure companies pay fair taxes.

The story begins in the 1930s when large companies started moving profits between countries to avoid taxes. Governments noticed they were losing tax revenue when companies charged artificial prices to their own subsidiaries.

How global transfer pricing developed:

• 1930s-1960s: First countries introduced basic related party rules
• 1970s-1990s: OECD created international guidelines for transfer pricing
• 2000s-2010s: Digital economy made transfer pricing more complex
• 2015-present: BEPS project created global standards for all countries

The Organization for Economic Cooperation and Development (OECD) became the leader in creating transfer pricing rules. Their guidelines help countries around the world create fair and consistent rules.

Today, over 100 countries have transfer pricing rules. This includes major economies like the United States, United Kingdom, Germany, and China. The UAE joined this group in 2023 when it introduced corporate tax.

Why this matters for UAE businesses:

When you deal with companies in other countries, you now face transfer pricing rules in multiple places. Your UAE company might need to follow UAE rules, while your parent company follows rules in their home country.

This global coordination helps prevent companies from avoiding taxes by moving profits around. But it also means more compliance work for businesses operating internationally.

Evolution of Transfer Pricing Compliance in GCC

The Gulf Cooperation Council (GCC) region has been slower to adopt transfer pricing rules compared to other parts of the world. This is changing rapidly as GCC countries diversify their economies beyond oil.

GCC transfer pricing timeline:

• 2017: Saudi Arabia introduced transfer pricing rules first
• 2019: Oman and Bahrain followed with their own rules
• 2022: Kuwait announced plans for transfer pricing legislation
• 2023: UAE implemented comprehensive transfer pricing regime
• 2024: Qatar began consultations on transfer pricing rules

Saudi Arabia led the way because of its Vision 2030 economic diversification program. The kingdom wanted to ensure foreign companies operating there paid appropriate taxes on their Saudi profits.

Common features across GCC transfer pricing rules: All GCC countries follow similar principles based on OECD guidelines. They require arm’s length pricing for related party transactions. They have documentation requirements for large transactions. They impose penalties for non-compliance.

Differences between GCC countries: Each country has different thresholds and specific requirements. Saudi Arabia focuses heavily on large multinational companies. The UAE has broader rules covering smaller businesses too. Oman has specific rules for oil and gas companies.

Regional business impact: Many companies operate across multiple GCC countries. This means they might face transfer pricing compliance in several jurisdictions. Companies need to coordinate their transfer pricing policies across the region.
The good news is that GCC rules are becoming more harmonized. This makes compliance easier for regional businesses compared to dealing with completely different systems.

Evolution of Transfer Pricing Compliance in UAE

The UAE’s journey to transfer pricing rules happened quickly compared to other countries. The decision came as part of the broader introduction of federal corporate tax in 2023.

UAE transfer pricing development:

• October 2022: Federal Decree-Law No. 47 introduced corporate tax framework
• June 2023: Corporate tax regime became effective
• October 2023: Federal Tax Authority published detailed transfer pricing guide
• 2024: First corporate tax returns filed with transfer pricing disclosures
• 2025: Full enforcement and audit activities expected

The UAE had to move fast to align with international standards. The country wanted to maintain its reputation as a business-friendly destination while meeting global tax transparency requirements.

Key UAE innovations: The UAE added some unique features to their transfer pricing rules. The connected person concept is broader than most countries. The documentation thresholds are designed to capture both large multinationals and smaller regional businesses.

Implementation challenges: Many UAE businesses had never dealt with transfer pricing before. The learning curve has been steep for companies, advisors, and even the tax authority itself. Training and education became crucial for successful implementation.

Federal Tax Authority approach: The FTA has taken an educational approach in the first years. They published detailed guides, conducted workshops, and provided clarification on complex issues. However, they’ve made clear that enforcement will increase over time.

The UAE system is now considered one of the most comprehensive in the Middle East. It covers both domestic and international related party transactions, which is unusual for new tax systems.

Compliance Obligations in Transfer Pricing Globally

Understanding global transfer pricing obligations helps UAE businesses see where their country fits in the international landscape. Most countries follow similar basic principles with local variations.

Common global requirements: Every country with transfer pricing rules requires the arm’s length principle. This means related party transactions must use market prices. Countries also require documentation to prove pricing is reasonable. Most have penalties for non-compliance.

Documentation standards worldwide: The OECD created standard documentation requirements that most countries adopt. This includes master files for multinational groups and local files for individual countries. Country-by-country reporting applies to the largest multinational companies.

Threshold variations: Different countries use different thresholds to determine when rules apply. Some focus only on large companies, while others include smaller businesses. The UAE’s approach is more inclusive than many developed countries.

Penalty structures: Penalties vary significantly between countries. Some impose percentage-based fines on transaction values. Others use fixed penalty amounts. The UAE follows a fixed penalty approach with amounts up to AED 375,000.

Coordination mechanisms: Countries try to avoid double taxation through mutual agreement procedures and advance pricing agreements. These mechanisms help resolve disputes when two countries disagree about transfer pricing.

Global trends: Transfer pricing is becoming more complex as the digital economy grows. Countries are developing new rules for intangible assets, digital services, and e-commerce transactions. The UAE system includes these modern considerations.

Transfer Pricing Concept and Framework

Transfer pricing seems complicated, but the basic concept is simple. It’s about making sure related companies charge each other fair prices, just like they would charge strangers. Think about buying a car. If you buy from a dealer, you pay market price. If you buy from your brother, you might get a family discount. Transfer pricing rules say businesses can’t give special deals to related companies just to avoid taxes.

The arm’s length principle: This is the foundation of all transfer pricing rules. It means related parties should deal with each other the same way unrelated parties would in similar circumstances.

Why governments care: When companies give artificial discounts to related parties, they shift profits from high-tax countries to low-tax countries. This reduces government tax revenue unfairly.

How the framework works: First, identify which transactions involve related parties. Second, determine what price independent parties would use. Third, document your analysis. Fourth, apply the arm’s length price to your transactions.

Types of tested transactions:

• Sale of goods and products between related companies
• Provision of services like management, IT, or consulting
• Lending money or borrowing from related parties
• Using trademarks, patents, or other intellectual property
• Sharing costs for common expenses

Practical application: Let’s say your Dubai company pays AED 500,000 per year to your London parent company for management services. You need to show that other Dubai companies pay similar amounts for similar management services from unrelated providers.

The framework provides flexibility in how you prove arm’s length pricing. You can use different methods depending on what information is available and what makes most sense for your situation.

TP 3-Step Approach – Identification, FAR, Economic Analysis

The UAE follows a systematic three-step approach for transfer pricing analysis. This method helps ensure consistent and thorough analysis of related party transactions.

Step 1: Identification of Related Party Transactions

The first step requires identifying all transactions with related parties and connected persons. This isn’t always obvious, especially with complex corporate structures.
Start by mapping your business relationships. Include all companies in your group, joint venture partners, and individuals with ownership or control. Don’t forget family relationships within the fourth degree of kinship.

Step 2: Functional Analysis and Risk (FAR)

This step analyzes what each party does in the transaction. You need to understand the functions performed, assets used, and risks assumed by each party.
Functions include activities like manufacturing, distribution, marketing, and management. Assets include property, equipment, intellectual property, and working capital. Risks include market risk, credit risk, and operational risk.

Step 3: Economic Analysis

The final step determines the arm’s length price or profit margin. This involves selecting the most appropriate transfer pricing method and applying it to your transaction.
You might compare your prices directly with market prices. Or you might compare profit margins with similar companies. The method depends on what information is available and reliable.

Practical example: Ahmed’s company provides IT services to their German parent company. Step 1 identifies this as a related party service transaction. Step 2 shows Ahmed’s company performs routine IT support using standard equipment with low risk. Step 3 compares their markup with other IT service providers to prove arm’s length pricing.

Documentation importance: Each step must be properly documented. The UAE tax authority will want to see your analysis if they audit your transfer pricing. Good documentation shows you followed a logical process and reached reasonable conclusions.

Identification of Transactions – Related Parties

Article 35 of the UAE Corporate Tax Law provides specific definitions for identifying related parties. These definitions are different from accounting standards, so you need to review relationships carefully.

Legal entity relationships: Two companies are related if one owns 50% or more of the other, either directly or indirectly. They’re also related if they’re both controlled by the same person or entity.

Individual relationships: Individuals are related if they’re connected within the fourth degree of kinship. This includes relationships by birth, marriage, adoption, or guardianship.

Individual and legal entity relationships: An individual and company are related if the individual (alone or with related parties) owns 50% or more of the company or controls it.

Special relationships: Taxpayers and their branches or permanent establishments are always related. All partners in unincorporated partnerships are related to each other and the partnership.

Control definition: Control means the ability to make key decisions about a company’s business, appoint or remove directors, or influence major policies. This can exist even without majority ownership.

Practical identification process: Create a detailed ownership chart showing all relationships. Include percentages for ownership interests. Mark individuals with family relationships. Note any control arrangements that don’t involve ownership.

Common mistakes in identification: Many businesses miss indirect relationships or forget about family connections. Some focus only on formal ownership and miss control relationships. Others rely on financial statement disclosures instead of UAE tax law definitions.

Example of complex identification: Sarah owns 40% of Company A. Her brother owns 30% of Company A. Together, they control Company A (70% family ownership). Company A owns 60% of Company B. Sarah is related to Company B through her indirect control, even though she doesn’t directly own shares in Company B.

Identification of Transactions – Connected Persons

Connected persons are defined separately in Article 36 of the UAE Corporate Tax Law. The rules for connected persons are stricter because they focus on preventing unreasonable payments to individuals.

Who qualifies as connected persons: Individual owners who directly or indirectly own shares in your company. Directors, officers, and senior managers of your company. Individuals related to owners or directors within the fourth degree of kinship. Partners in unincorporated partnerships.

Types of payments covered: Salaries, bonuses, and employment benefits. Consulting fees and professional service payments. Employer contributions to pension funds. Interest on loans from connected persons. Accommodation, education, and other benefits provided by the company.

Lower threshold in respect of connected parties: The threshold is AED 500,000 per year compared with AED 40 million for related parties, which means that modest payments to family members or directors could create compliance issues.

Tax deductibility rules: Payments must meet the arm’s length standard and must be wholly and exclusively for business purposes to be tax deductible. The expenditure must not be of a capital nature.

Non-compliance consequences: If the payments do not meet these criteria, the relevant tax authority may deny tax deductibility. This will increase taxable income and tax liability. In addition, the payment may be a taxable receipt by the recipient which may leave open the possibility of double taxation.

Practical example: Lets assume Khalid owns a construction company and pays his wife AED 600,000 per year for bookkeeping services. As this payment exceeds AED 500,000, Khalid is required to provide documentation to support he is discharging his obligation in a reasonable manner having regard to what other companies pay for bookkeeping services.

Best practices for connected person compliance: Establish clear job descriptions and employment contracts. Research market rates for similar positions. Document the business rationale for all payments. Get board approval for significant payments to connected persons.

Identification of Transactions – Virtue of Control

Control is a key concept in UAE transfer pricing that goes beyond simple ownership percentages. Understanding control helps identify related party relationships that might not be obvious from ownership structures.

Control definition in UAE law: Control means the ability to direct the management and policies of an entity. This includes appointing or removing directors, making major business decisions, or having significant influence over operations.

Types of control arrangements: Direct control through majority ownership. Indirect control through chains of ownership. Control through voting agreements or shareholder pacts. Control through debt arrangements or financing structures. Control through management contracts or operational agreements.

Direct control through majority ownership. Indirect control through chains of ownership. Control through voting agreements or shareholder pacts. Control through debt arrangements or financing structures. Control through management contracts or operational agreements.
Significant influence factors: Being the largest customer or supplier might create control. Providing essential services or technology can create dependence. Having exclusive distribution rights might create control. Guaranteeing loans or providing financial support creates influence.

Practical examples of control: A vendor providing you 80% of your raw material has substantial control over your business. A customer purchasing 90% of your product can control your pricing and subsequently your operations.A technology provider with exclusive licensing rights might control your business model.

Documentation requirements: You need to document control relationships even when they don’t involve ownership. Have records of management contracts, exclusive agreements, and financing arrangements. Document decision-making processes and who has influence over key business choices.

Control analysis process: Review all significant business relationships. Analyze decision-making authority and influence patterns. Consider economic dependence and bargaining power. Document control relationships that create related party status.

Impact on transfer pricing: Control relationships can create related party status requiring arm’s length pricing. They might also affect which transfer pricing method is most appropriate. Control analysis helps determine the tested party in benchmarking studies.

The UAE tax authority will examine control relationships during audits. Proper documentation of control arrangements helps support your transfer pricing positions and demonstrates compliance with related party identification requirements.

FAR – Attribution Rules

Functional Analysis and Risk (FAR) attribution is crucial for determining appropriate transfer pricing outcomes. This analysis helps identify which party should earn what level of profits based on their contributions to value creation.

Function analysis:

Functions are the activities that each party performs in the related party transaction. These might include research and development, manufacturing, marketing, distribution, and support services.

Document what each party actually does, not just what contracts say they do. The UAE tax authority looks at economic reality rather than legal form. Keep records of actual activities and decision-making patterns.

Asset analysis:

Assets include both tangible and intangible property used in the business. Tangible assets are equipment, inventory, and facilities. Intangible assets include trademarks, patents, customer lists, and know-how.

The party that owns and controls valuable assets typically earns higher profits. Asset analysis helps determine which entity should be the tested party in benchmarking studies.

Risk analysis:

Risk analysis examines who bears different types of business risks. Market risk relates to demand and pricing changes. Credit risk involves customer payment defaults. Operational risk includes production and quality issues.

The party that assumes and controls risks should earn returns for bearing those risks. Risk allocation affects profit attribution between related parties.

Practical FAR application:

Ahmed’s Dubai company manufactures products for their German parent company. FAR analysis shows the Dubai company performs routine manufacturing with limited risks. The German company controls product design, marketing, and customer relationships. Based on this analysis, the Dubai company should earn a stable manufacturing margin while the German company earns residual profits.

Documentation requirements:

Keep detailed records of functions, assets, and risks for each related party. Include organizational charts, job descriptions, and process documentation.

FAR – Characterization of a Company

Company characterization determines each entity’s role in the value chain and helps select appropriate transfer pricing methods and profit levels.

Common characterization types:

Principal companies take entrepreneurial risks and control key value-creating activities. They typically own important intangible assets and make strategic decisions. Contract manufacturers or service providers perform routine functions with limited risks. They usually earn stable margins based on costs or turnover.

Limited risk distributors buy and resell products with minimal market risk. Full-risk distributors assume inventory and market risks. Service companies might be routine or strategic depending on the functions they perform.

Characterization factors:

Control over business strategy and key decisions indicates principal status. Ownership of valuable intangible assets supports principal characterization. Assumption and management of significant risks suggests entrepreneurial functions.

Routine, repetitive activities with limited decision-making authority indicates service provider or contract party status. Limited asset ownership and risk assumption supports limited risk characterization.

Impact on profit expectations:

Principal companies should earn residual profits after paying arm’s length returns to other parties. Contract parties typically earn stable markups on costs. Limited risk entities usually earn modest margins on sales or assets.

Practical characterization example:

Fatima’s UAE company provides regional management services to group companies across the Middle East. Characterization analysis shows the company makes strategic decisions for the region, manages key customer relationships, and assumes market risks. This supports characterization as a regional principal entity earning profits based on regional performance.

Documentation importance:

Document your characterization analysis with evidence of actual functions, asset ownership, and risk assumption. Include board minutes, management reports, and operational procedures that support your characterization.

Proper characterization helps select the most appropriate transfer pricing method and supports reasonable profit outcomes that the UAE tax authority will accept.

Compliance Obligations – Mandatory Documentation Requirements

The UAE has specific documentation requirements that vary based on your transaction volumes and company characteristics. Understanding these requirements helps ensure complete compliance.

Master File requirements:

Companies that are part of multinational groups with consolidated revenue over AED 3.15 billion must prepare master files. UAE-headquartered groups without foreign operations don’t need master files.

Master files provide high-level information about the group’s business, transfer pricing policies, and global income allocation. They help tax authorities understand the broader context of your transfer pricing positions.

Local File requirements:

Local files are required if you’re part of a multinational group with revenue over AED 3.15 billion or if your own revenue exceeds AED 200 million. Local files focus on your UAE entity’s specific related party transactions.

Local files include detailed information about your business, related party transactions, financial data, and transfer pricing analysis. They must be updated annually and maintained in English or Arabic.

Disclosure Form requirements:

All taxpayers with related party transactions exceeding AED 40 million annually must complete disclosure forms. Individual transaction types must exceed AED 4 million to be separately disclosed.

Connected person payments exceeding AED 500,000 annually must also be disclosed. The disclosure form is submitted with your annual corporate tax return.

Country-by-Country Reporting:

UAE-headquartered multinational groups with revenue over AED 3.15 billion must file country-by-country reports. These reports show the group’s global income allocation and tax payments by country.

Supporting documentation:

Even if you don’t reach the formal documentation thresholds, you still need to be able to maintain documentation that would support your transfer pricing positions. This includes contracts, invoices, market research, and analysis supporting arm’s length pricing.

Timeline requirements:

Documentation must be prepared contemporaneously, not after the tax authority requests it. Master files and local files must be provided within 30 days of FTA request. Country-by-country reports are due 12 months after year-end.

Practical compliance approach:

The first step is to generate a documentation checklist based on your circumstances. Then outline what procedures you will have in place on an annual basis going forward to update and maintain your documentation. Train your team on documentation standards and deadlines.

Supporting Methodologies – Disclosure Form

The UAE disclosure form is an important compliance instrument and requires cautious contents and fair completion. This form provides the tax authority with vital information about your related party transactions.

Disclosure form structure:

The form is divided into sections covering different types of related party transactions. Each section requires specific information about transaction types, parties involved, values, and pricing methods used.

Related party transaction disclosures:

For each transaction type exceeding AED 4 million, you must provide detailed information. This includes transaction descriptions, related party details, transaction values, and transfer pricing methods applied.

You must explain why your pricing meets the arm’s length standard. Include brief summaries of any benchmarking studies or market analysis supporting your positions.

Connected person disclosures:

If annual connected person payments are greater than AED 500,000, they must be disclosed separately. Identify the connected person; their relationship to your company; the amounts paid; and the business reason for the payments.

Include information about employment terms, service descriptions, and market rate analysis for connected person payments.

Preparation best practices:

Do not wait until the filing date to put the disclosure form together. Then, keep adequate records throughout the year so that you have materials to write the form. Read the form and check it carefully for accuracy and completeness before submitting the original form.

Common completion errors:

Failing to include all transaction types in threshold calculations. Incorrect related party identification or relationship descriptions. Inadequate explanation of transfer pricing methods and arm’s length analysis.

Missing connected person disclosures or incorrect threshold calculations. Poor documentation of business rationale for transactions.

Supporting evidence:

Although no supporting documents are submitted along with the disclosure form, you must retain them for a future FTA review. Be diligent about organizing your documentation so that you can respond promptly to any request for information.

The disclosure form creates the tax authority’s first impression of your transfer pricing compliance. Accurate, complete disclosure forms reduce audit risk and demonstrate good faith compliance efforts.

Advanced TP Audit Concerns

As UAE transfer pricing enforcement matures, businesses need to prepare for more sophisticated audit approaches and potential challenges from the Federal Tax Authority.

Audit selection criteria:

The FTA likely focuses on companies with large related party transaction volumes, unusual profit margins, or inconsistent disclosure forms. Industries with high related party activity or complex structures face higher audit risk.

Common audit challenges:

Inadequate comparable company analysis and benchmarking studies. Poor documentation of functional analysis and business rationale. Inconsistencies between transfer pricing positions and actual business operations.

Unreasonable connected person payments without proper market analysis. Missing or incomplete documentation requested during audits.

Audit preparation strategies:

Maintain comprehensive transfer pricing documentation throughout the year. Conduct annual reviews of transfer pricing positions and update analysis as needed. Train key personnel on transfer pricing concepts and audit procedures.

Defense file organization:

Create organized defense files with all supporting documentation. Include functional analysis, comparable studies, board minutes, and market research. Ensure documentation tells a coherent story about your transfer pricing positions.

Professional representation:

Consider engaging transfer pricing specialists for audit defense. Professional representation helps ensure technical accuracy and proper communication with tax authorities.

Dispute resolution options:

The UAE provides mutual agreement procedures for cross-border transfer pricing disputes. Advance pricing agreements may be available for complex transactions. Understanding these options helps plan dispute resolution strategies.

Practical audit readiness:

Conduct internal transfer pricing reviews to identify potential issues. Update documentation to address any weaknesses or gaps. Establish procedures for responding to FTA information requests quickly and completely.

Good audit preparation reduces stress and improves outcomes when the tax authority reviews your transfer pricing compliance.

Conclusion

Understanding UAE related party transactions and transfer pricing compliance is essential for modern business operations in the Emirates. The rules affect virtually all companies with related party relationships, from family businesses to large multinationals. The key requirements are straightforward. Identify all related parties and connected persons using UAE legal definitions. Calculate transaction volumes to determine documentation obligations. Apply arm’s length pricing to all related party transactions.

Maintain comprehensive documentation supporting your transfer pricing positions. Don’t underestimate the importance of proper compliance. The UAE tax authority is building enforcement capabilities and audit expertise. Early compliance efforts protect your business from significant tax adjustments and penalties later.

The UAE’s transfer pricing system is here to stay and will continue evolving. Building strong compliance foundations now positions your business for long-term success in the UAE market.

FAQ’s