How to Prepare Transfer Pricing Documentation for the UAE FTA

Article 55 of the UAE Corporate Tax Law gives the Federal Tax Authority the right to request your transfer pricing documentation whenever they want. You then have 30 days to hand it over. If you don't have documentation ready, that's a problem. You won't be able to prepare quality documentation in 30 days, and the FTA knows it.

Since June 2023, businesses with related party transactions have needed to comply with transfer pricing rules. This article walks through who needs documentation, what goes in it, and how to stay compliant with the FTA Transfer Pricing Guide.

Who Needs to Prepare Documentation?

The UAE uses a three-tiered system. Which tier applies to you depends on your revenue and transaction volumes.

Tier 1: Transfer Pricing Disclosure Form

If you do business with related parties, you'll likely need to complete the disclosure form as part of your corporate tax return.

The thresholds, according to FTA guidance and Big 4 technical publications:

• Total related party transactions over AED 40 million
• Any individual category (goods, services, financing, IP) over AED 4 million
• Connected person payments over AED 500,000

The form gets filed with your annual return, due nine months after your year-end.

Tier 2: Master File and Local File

Ministerial Decision No. 97 of 2023 requires both files if you meet either threshold:

• You're part of a multinational group with AED 3.15 billion or more in consolidated revenue
• Your UAE revenue hits AED 200 million or more

There's a useful exception: if your group only operates in the UAE (no foreign entities), you skip the Master File. But you still need the Local File if you're over AED 200 million.

When the FTA asks for these files, you have 30 days. That's not a soft deadline—it starts the day they send the request.

Tier 3: Country-by-Country Reporting

This only applies to large multinationals with consolidated revenue over AED 3.15 billion. The report is due 12 months after fiscal year-end.

Why Free Zone Entities Need to Pay Extra Attention

If you run a qualifying free zone person (QFZP), transfer pricing compliance isn't just about getting your tax calculation right. It's about keeping your 0% tax status.

What Happens When Things Go Wrong

For a mainland entity with transfer pricing problems:

• The FTA adjusts your income
• You pay 9% tax on the adjustment
• They add a 15% penalty
• You pay 14% annual interest

For a QFZP with transfer pricing problems:

• You lose QFZP status completely
• You pay 9% tax on everything—not just the problem amount
• The status loss lasts five years
• It applies retroactively

Here's what that looks like in practice: a DIFC entity with AED 50 million in qualifying income loses its QFZP status. That's AED 4.5 million in tax per year, times five years. Plus penalties and interest. Total exposure easily exceeds AED 22 million.

Three Common Problems We See

Management Fees

Your DIFC entity pays AED 2 million per year to your Singapore parent for "management services."

The FTA will want to know:

• What services actually got provided?
• Where's the service agreement that describes them?
• How do you track the time spent?
• How did you calculate the fee?
• What do other service providers charge?
• If you have a management team in DIFC, why are you paying for management services?

You need a proper service agreement, monthly activity reports, an allocation method you can defend, and a benchmarking study. The typical markup on costs is 5-8%. You also need evidence the services were actually delivered—emails, reports, meeting minutes.

If the FTA decides you're paying for services that weren't provided or paying too much, they'll disallow the expense. Your DIFC entity's income goes up. If that pushes your non-qualifying income over the de minimis threshold, you lose QFZP status for five years.

Commodity Trading

For commodity traders in free zones, there's a specific UAE requirement that doesn't exist elsewhere. To maintain QFZP status, your prices need to come from recognized price reporting agencies.

The approved agencies per Ministerial Decision No. 230 of 2025: S&P Global (Platts, Fertecon), Argus Media, ICIS, OPIS, RIM Intelligence, CRU Group, Quantum Commodity Intelligence, Fastmarkets, General Index, ICE, MONTEL, Spark Commodities, and Expana.

Your documentation needs to show which benchmark you used, when you pulled the price, and what adjustments you made for quality, delivery terms, timing, and credit risk.

Without this documentation, you can't prove arm's length pricing. You lose QFZP status. Nine percent tax on everything for five years.

Intra-Group Loans

If your free zone entity borrows from your parent company, the interest rate needs to reflect what an independent lender would charge. You need a credit analysis, market interest rate comparisons, and justification for the terms.

For clients with entities in DIFC and other UAE free zones, we handle transfer pricing compliance as part of ongoing work. It's the only way to protect the 0% tax status.

The Arm's Length Principle

Related party transactions need to be priced like independent party transactions. That's the arm's length principle.

Independent parties negotiate based on market forces, their own interests, and what alternatives they have. Related parties might price things based on group tax strategy or internal policies that have nothing to do with market rates.

The arm's length principle ensures that related party pricing reflects economic reality.

Who Counts as a Related Party?

Under the UAE Corporate Tax Law:

• Direct or indirect ownership over 50%
• Common ownership over 50%
• Family relationships within the fourth degree
• Significant management influence

Transactions That Need Arm's Length Pricing

• Sales between group companies
• Management fees
• Royalty payments
• Loans between group entities
• Guarantees
• Cost-sharing arrangements

This applies to domestic transactions too. If a mainland entity and a QFZP are related and have different tax rates, the transactions between them need to be at arm's length.

The Five Transfer Pricing Methods

The UAE follows the OECD Transfer Pricing Guidelines. There are five recognized methods. You pick whichever one fits your situation best.

Comparable Uncontrolled Price (CUP)

Compare your price to what independent parties pay for the same thing. Works well for commodities and standard products where you can find good comparables.

Resale Price Method (RPM)

Take the price your distributor charges to third parties. Subtract a reasonable margin. What's left is the arm's length purchase price from the related party supplier.

Example: Your distributor sells products at AED 1,000. Independent distributors in similar situations earn 13-16% margins. Using 15%, the arm's length purchase price is AED 850.

Cost Plus Method (CPM)

Start with the supplier's costs. Add a reasonable markup based on what independent suppliers earn.

Example: Your UAE entity provides IT services that cost AED 100,000 to deliver. Independent IT service providers earn 12-18% markups. Using 15%, the arm's length service fee is AED 115,000.

Transactional Net Margin Method (TNMM)

This is the most common method in UAE practice. You compare net profit margins rather than prices.

The UAE uses the interquartile range (IQR)—the 25th to 75th percentile—not the full range. If your margin falls outside the IQR, the FTA can adjust it to the median.

Example: Your UAE manufacturer earns a 6% operating margin. Comparable manufacturers earn 5-20% (full range) with an IQR of 8-15%. Your 6% is below the IQR. The FTA might adjust your profit to 11.5% (the median), which increases your taxable income.

Profit Split Method (PSM)

For highly integrated operations where both parties contribute significant unique value, you split the combined profits based on relative contributions. This is the most complex method and gets used less often.

What Goes in the Local File

The Local File is your main defense in an audit. It needs to show that your related party transactions are priced correctly.

Basic Information

Start with organizational structure, business activities, and management structure. This section is straightforward.

Description of Controlled Transactions

For each category of related party transaction—goods, services, financing, IP—describe what happened and why. What got exchanged, how much, why the transaction made commercial sense, and how you determined the price.

Functional Analysis

This is where audits are won or lost. The functional analysis determines where profits should sit.

Functions: What does your UAE entity actually do? Manufacturing, distribution, marketing, strategic decisions. Be specific. "We handle distribution" isn't enough. What decisions does your team make? What decisions get made by the parent company?

Assets: What assets contribute to earning the income? Property, equipment, inventory for tangible assets. IP, customer relationships, know-how for intangibles. Working capital for financial assets.

Risks: What risks does this entity bear? Market risk (will customers buy?), credit risk (will customers pay?), inventory risk (will products sell before they're obsolete?), currency risk, regulatory risk.

For each risk, identify who makes the decisions about it, who has the financial capacity to absorb it, and who actually suffers when things go wrong.

Example for a distributor: Functions include sales and local marketing. Assets include warehouse space and inventory. Risks include inventory obsolescence and customer credit defaults. This profile suggests a routine return in the 8-12% range.

Comparability Analysis

Show your benchmarking work. Which database you used (Bureau van Dijk, Capital IQ). What search criteria. Which companies you selected and why. Which companies you rejected and why.

The FTA prefers UAE or GCC comparables when available. If you're using Middle East or international comparables, explain why local data wasn't adequate.

Method Application

Explain which method you chose and why. Walk through the calculation. Show where your result falls relative to the comparables.

How to Build a Defensible Benchmark

Start Local

The FTA wants to see UAE or GCC comparables first. If those aren't available or sufficient, you can expand to the Middle East region. If you use international comparables, document why you had to go that broad.

Selection Process

Run your quantitative screens first: industry codes, revenue size, geographic location, time period (usually three years), financial health. Then do qualitative analysis: business model, asset profile, risk profile, market conditions.

You need at least 4-6 solid comparables. Fewer than that and your study looks weak.

Document Rejections

Keep a rejection matrix showing which companies you looked at and why you excluded them. Failed the independence test. Different business model. Data wasn't available. This shows you did the work properly rather than cherry-picking favorable results.

Common Mistakes

Using benchmarking data that's more than two years old. Not having enough comparables. Picking a geographic region that doesn't make sense. Not explaining functional differences between your entity and the comparables.

What Happens When You Get It Wrong

Administrative Penalties

Cabinet Decision No. 75 of 2023 sets penalties for not maintaining proper records and not responding to FTA requests on time.

Transfer Pricing Adjustments

The bigger problem is when the FTA adjusts your pricing. They recalculate your taxable income, charge 9% tax on the difference, add a 15% penalty on the underpaid tax, and charge 14% annual interest from when the tax should have been paid.

For a AED 1 million adjustment:

• Tax: AED 90,000
• Penalty: AED 13,500
• Interest (assuming one year): AED 12,600
• Total: AED 116,100

The interest keeps running monthly until you pay.

For a AED 5 million adjustment, you're looking at nearly AED 600,000 in total exposure. For AED 10 million, over AED 1.1 million.

What Triggers Audits

Based on what we're seeing: consistent losses while the group is profitable, big margin swings without explanation, numbers that don't reconcile between your corporate tax return and VAT return, large payments to offshore related parties, free zone entities claiming high substance but showing thin margins.

Your Annual Compliance Process

First Quarter (January-March)

Collect all the financial data from your closed year. Pull together everything related to related party transactions. Identify any new relationships or transaction types. Note any business changes that affect your functional analysis.

Second Quarter (April-June)

Update your functional analysis if anything changed. Run or update your benchmarking studies. Determine whether current pricing is arm's length. Update your Local File and Master File with current year data.

Third Quarter (July-September)

Finalize your documentation. Complete the disclosure form. Make sure everything reconciles with your corporate tax return. Have someone review it—internal tax team or external advisor.

Fourth Quarter (October-December)

File your tax return (nine months after year-end for most companies). Store your documentation where you can access it quickly if the FTA asks. Start thinking about what changes for next year.

Things That Actually Matter

Update your documentation every year, even if the FTA doesn't ask for it. Include real evidence—contracts, emails, meeting notes. Update benchmarking annually because market conditions change. Explain why you picked your method. Keep your rejection matrix.

Don't copy-paste from last year without updating the facts. Don't use generic templates that could apply to anyone. Don't assume the FTA won't request your documentation—they're requesting it more and more.

Advance Pricing Agreements

An APA is an agreement with the FTA where they pre-approve your transfer pricing method. You get certainty that they'll accept your pricing for future years.

FTA Decision No. 2 of 2025 announced that unilateral APAs (just between you and the FTA) will be available from Q4 2025. Bilateral APAs (involving a foreign tax authority) will come later.

APAs make sense for large recurring transactions, complex pricing structures, and situations where you want certainty across multiple years. The application process typically takes 12-18 months for unilateral APAs, longer for bilateral ones.

This is new in the UAE. Details are still being worked out.

How We Help Clients with This

Transfer pricing sits alongside corporate tax, business structure, VAT, and free zone compliance. We handle them together so the positions stay consistent.

Documentation Work

We prepare Master Files and Local Files that follow FTA guidelines. We complete disclosure forms. We do annual updates. For clients who already have documentation, we review it for quality and completeness.

Compliance Management

We run the annual compliance calendar. We do pre-filing risk assessments to catch problems before they become FTA issues. For free zone entities, we make sure transfer pricing documentation aligns with Economic Substance requirements.

Audit Response

When the FTA requests documentation, we respond within the 30-day window. We represent clients in transfer pricing audits. We prepare the analysis and handle the back-and-forth.

Planning Work

Transfer pricing comes up in new business structures, M&A transactions, business restructurings, and cross-border planning. We work through the transfer pricing implications before decisions get made.

Why Clients Work With Us on This

We already handle the corporate tax and VAT work, so we know the business. For companies where we set up the DIFC entity or free zone structure, we understand how everything fits together.

For free zone entities, we know both the transfer pricing rules and the QFZP requirements. We've worked through how they interact.

For retainer clients, transfer pricing compliance is part of the ongoing work. We do quarterly reviews. When the FTA requests documentation, it's ready.

Bottom Line

Transfer pricing documentation is required for businesses over the revenue thresholds—AED 200 million in UAE revenue or part of a group over AED 3.15 billion globally.

The 30-day response window when the FTA requests documentation is real. You can't prepare good documentation in 30 days if you haven't already done the work.

For free zone entities, transfer pricing compliance is about protecting your 0% tax status. The stakes are higher because non-compliance means losing QFZP status for five years.

Your functional analysis determines where profits should sit. The quality of your documentation determines how the audit goes.

This is ongoing compliance work, not a one-time project. The documentation needs annual updates.

For businesses in DIFC, DMCC, JAFZA, and other free zones, transfer pricing compliance is essential for maintaining QFZP status.

Contact us to discuss your transfer pricing compliance needs.

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