The UAE’s Corporate Tax regime has placed Transfer Pricing (TP) at the forefront of tax compliance. With the Federal Tax Authority (FTA) demanding adherence to the “arm’s length principle” for all related-party transactions, a one-time TP study is not sufficient.
For businesses that conducted a full benchmark study in 2023 or 2024, Year 2 and Year 3 require a mandatory “benchmarking update” or margin refresh to keep documentation audit-ready.
This blog outlines the essentials of updating comparable company margins in the UAE for 2025.
What is a Benchmarking Update in the UAE?
Under UAE TP guidelines, a full benchmarking study (searching for new comparable companies) is typically required every three years. However, the financial data of those selected comparable companies must be updated annually to reflect current market conditions.
The Cycle:- Year 1: Full benchmarking study (detailed search, FAR analysis).
- Year 2: Financial data update (refreshing margins of the same companies).
- Year 3: Financial data update (refreshing margins of the same companies).
Why Update Margins in Years 2 and 3?
- Market Volatility: The economic landscape changes rapidly. A margin that was “arm’s length” in 2023 might not be in 2025.
- Audit Readiness: The FTA checks if your intercompany transactions are priced according to current market realities, especially when you file your Corporate Tax Return.
- Preventing Revenue Leakage: If your company’s profitability drops, but your competitors (comparables) are making higher margins, an outdated benchmark could result in heavy penalties and adjustment of taxable income.
Key Considerations for 2025 Benchmarking Updates
- Database Selection: Utilise reliable databases (e.g., Prowess, Orbis) to extract the latest financial data (2024/2025 data, depending on available data sets).
- Methodology (TNMM): The Transactional Net Margin Method (TNMM) is frequently used in the UAE, focusing on net profit indicators like Operating Margin (OM) or Return on Assets (ROA).
- Local/Regional Focus: Start with UAE-based comparables. If limited, consider expanding to regional markets (such as the Middle East) or similar foreign markets, while making necessary adjustments for economic differences.
- Interquartile Range: The FTA generally prefers the interquartile range to determine the arm’s length range, rather than a simple average.
FAQs on UAE TP Benchmarking Updates
- Do I need to redo the whole TP study every year?
No, a full search for comparable companies is usually required every three years. Years 2 and 3 are for updating the financial margins of the same companies.
- When is an immediate refresh of the benchmark required?
A fresh benchmarking study is required if your business has significant changes in functions, assets, risks (FAR), or business restructuring, regardless of the 3-year cycle.
- What happens if my company’s margin is outside the updated range?
If your transaction price is outside the interquartile range of the updated comparables, you may need to perform a transfer pricing adjustment to align with the arm’s length principle.
- Are inter-Free Zone transactions subject to these updates?
Yes. Transactions between a mainland company and a Free Zone entity, or between two Free Zone entities, must comply with arm’s length principles.
How Transfer Pricing Consultants at Tax Gian Can Help
Maintaining compliance with the UAE’s rapidly evolving transfer pricing regulations requires specialised expertise. An incorrect benchmark, or failing to update it, can lead to significant penalties.
Tax Gian offers expert Transfer Pricing services, including:- Annual Benchmark Updates: Comprehensive refresh of comparable company margins (Year 2/3).
- Full TP Documentation: Preparation of Master Files and Local Files.
- FTA Audit Support: Defending your transfer pricing policies.
- TNMM Analysis: Accurate calculation of arm’s length profit margins.
