The arm’s length standard is the foundation of UAE transfer pricing, and it is where most businesses with related party dealings fall short. Under Article 34 of Federal Decree-Law No. 47 of 2022, a transaction between related parties must be priced as it would have been between independent businesses.
Since the Federal Tax Authority (FTA) issued its Transfer Pricing Guide in October 2023, the expectation has been clear: pricing must be supported by a method, evidence and documents, not by a belief that a figure is reasonable.
This guide explains what the standard requires, the eight gaps we see most often, what a miss can cost, and how to close each gap before an FTA enquiry does it for you.
What the arm’s length standard requires in the UAE
Article 34 treats a transaction or arrangement between related parties as meeting the standard if its results are consistent with those that unrelated parties would have achieved in a similar transaction under similar circumstances. In practice, the price, margin and terms of every intercompany deal must reflect market conditions rather than group convenience.
The standard applies to goods, services, financing, royalties and intangibles. It covers:
- A UAE company and its overseas parent or subsidiary
- A mainland company and its free zone affiliate
- Two UAE companies under common ownership or control
- Shareholder loans, management fees and cost allocations between group entities
Article 35 defines related parties broadly. It reaches ownership and control relationships, and it includes relatives up to the fourth degree of kinship.
Arm’s length standard versus the market value test
Payments to connected persons, such as owners, directors and their relatives, are tested differently. Article 36 applies a market value test, and a deduction can be denied where a payment exceeds what an independent party would accept.
Many businesses blur the two and apply a casual ‘reasonable amount’ judgement to related party pricing. Article 34 expects methodology-based support instead.
The five recognised transfer pricing methods
The methods mirror the OECD Transfer Pricing Guidelines:
- Comparable Uncontrolled Price (CUP) method
- Resale Price method
- Cost Plus method
- Transactional Net Margin Method (TNMM)
- Transactional Profit Split method
The FTA expects the most appropriate method for each transaction, chosen after a functions, assets and risks (FAR) analysis. Where none of the five can be reliably applied, Article 34(4) permits another method, provided the result still meets the standard.
Profit-based methods rely on benchmarking. The FTA’s guide endorses the interquartile range, the middle 50% of comparable results, as the way to set the arm’s length range.
Where UAE businesses fall short on transfer pricing
Most exposure does not come from aggressive planning. It comes from gaps that build quietly over a tax period and surface only when the FTA asks questions. These are the eight we meet most often.
1. Assuming domestic transactions are outside the rules
Article 34 applies to domestic and cross-border dealings alike. A service charged by a mainland company to its free zone sister company at a below-market rate is as exposed as an inflated import from an overseas parent.
2. Incomplete related party and connected person mapping
Finance teams usually capture the obvious group entities and miss indirect ownership chains, common control and family relationships. A transaction that is never identified is never priced, documented or disclosed.
3. Pricing set once and never benchmarked
Group pricing is often agreed at the start and never tested again against current, UAE-relevant comparables. Without a benchmarking study, a business cannot show that its result sits within the interquartile range.
A result outside the range may be adjusted by the FTA, and the median is the usual reference point in practice.
4. Documentation prepared after the FTA asks
Where a Master File and Local File are required, they must be provided within 30 days of an FTA request. Documentation built after the request arrives rarely reflects the thinking behind the original price, and the FTA expects records that are contemporaneous.
Thirty days is also too short to commission a credible benchmarking study from scratch.
5. Missing the Disclosure Form thresholds
The Transfer Pricing Disclosure Form is filed with the Corporate Tax return. In summary:
- Related party transactions above AED 40 million in aggregate trigger disclosure, with categories above AED 4 million reported
- Payments or benefits to a connected person above AED 500,000 (together with their related parties) are disclosed separately
- The form is submitted with the return, within nine months of the end of the tax period
Many finance teams do not realise a threshold has been crossed until the return is being prepared.
6. Unsupported shareholder loans and management fees
Interest-free shareholder loans, round-sum management charges and family remuneration are among the arrangements most often challenged. They rarely reflect what an unrelated lender or service provider would accept, and they are often unsupported by a written agreement or evidence that services were delivered.
7. Overlooking Master File and Local File triggers
Under Ministerial Decision No. 97 of 2023, a Master File and a Local File are required where either of these applies:
- Standalone revenue of AED 200 million or more in the tax period
- Membership of a multinational group with consolidated revenue of AED 3.15 billion or more
Businesses below these thresholds must still apply the arm’s length standard and file the Disclosure Form where it applies.
8. Treating Qualifying Free Zone Person status as separate from transfer pricing
For a Qualifying Free Zone Person (QFZP), compliance with Articles 34 and 55 is a condition of keeping the 0% rate on qualifying income. A pricing or documentation failure can therefore put the free zone benefit itself at risk, regardless of revenue size.
What a transfer pricing miss can cost
Article 34 gives the FTA authority to adjust taxable income where pricing does not meet the standard. The practical consequences include:
- Upward adjustment of taxable income, with additional Corporate Tax at 9%
- Denied deductions for connected person payments above market value
- Administrative penalties of AED 10,000 for a first failure to keep required records, including transfer pricing documentation, and AED 20,000 for a repeat within 24 months
- Loss of the 0% QFZP rate where the conditions are breached
- Wider audit exposure, as transfer pricing files often start a broader Corporate Tax review
- Double taxation on cross-border transactions where the other jurisdiction does not give corresponding relief, unless an Advance Pricing Agreement or Mutual Agreement Procedure resolves it
The wider penalty framework was revised by Cabinet Decision No. 129 of 2025 with effect from 14 April 2026, so confirm current figures before filing.
What changed in 2026: downward adjustments under CTP011
On 15 July 2026, the FTA issued Public Clarification CTP011. Where a related party transaction in the financial statements does not reflect an arm’s length outcome, a taxpayer may make a downward adjustment to taxable income in the Corporate Tax return without prior FTA approval.
The flexibility comes with conditions:
- The adjustment stays open to FTA review or audit
- Every transaction subject to the adjustment must appear in the Related Party Transactions Schedule, whatever its value and regardless of the usual disclosure thresholds
- The taxpayer should hold a rationale for the adjustment, an arm’s length analysis with benchmarking, a reconciliation between the financial statements and the return, and evidence of the corresponding adjustment by the related party
The clarification reflects the FTA’s position from the effective date of the legislation, so returns already filed with downward adjustments should be reviewed. Commentary that still says prior approval is needed is out of date.
Transfer pricing compliance checklist
- Map every related party and connected person under Articles 35 and 36, including indirect ownership chains
- List all controlled transactions, including intra-UAE and mainland-to-free-zone dealings
- Select and document the most appropriate method for each transaction category
- Run a current benchmarking study against UAE-relevant comparables
- Put written intercompany agreements in place for loans, services and royalties, on terms a third party would accept
- Test your totals against the AED 40 million, AED 4 million and AED 500,000 disclosure thresholds before the return is prepared
- Build Master File and Local File documentation early if revenue approaches AED 200 million or the group approaches AED 3.15 billion
- Review pricing before the financial statements are signed, so adjustments are booked in the accounts and not forced into the return
How Tax Gian supports your transfer pricing compliance
Tax Gian, a division of Jitendra Tax Consultants, helps UAE businesses turn the arm’s length standard from a paper policy into a position that stands up to FTA review. Our transfer pricing specialists support you with:
- Transfer pricing advisory services to map transactions and select the right method
- Transfer pricing benchmarking services to support your arm’s length range
- Transfer pricing compliance and documentation, including Master File and Local File preparation
- Transfer Pricing Disclosure Form preparation alongside your Corporate Tax return
- Transfer pricing policy drafting and review for intercompany agreements and group policies
- Transfer pricing defence service
Tax Gian’s transfer pricing team can review your related party transactions, benchmark your pricing and prepare the documents your return and the FTA will expect. Contact Tax Gian to book a consultation
Frequently asked questions
Does the arm’s length standard apply to transactions between two UAE companies?
Yes. Article 34 applies to domestic and cross-border related party transactions alike, including dealings between a mainland entity and a free zone affiliate.
What is the difference between the Disclosure Form and the Master File and Local File?
The Disclosure Form is a summary filed with the Corporate Tax return once transaction thresholds are met. The Master File and Local File are detailed documentation, required only above the revenue thresholds, and must be produced within 30 days of an FTA request.
What happens if the FTA finds that pricing is not at arm’s length?
The FTA can adjust taxable income to an arm’s length result, which increases the Corporate Tax payable. Administrative penalties can follow, and a QFZP can put its 0% rate at risk.
