Transfer Pricing in UAE: What Founders With Multiple Entities Must Know

Most UAE founders with two or more entities have transactions between them. A management fee here. An intercompany loan there. Maybe a freezone entity licensing something to the mainland operation. Under UAE Corporate Tax, every one of those transactions has a price. And that price must be justifiable.

This is transfer pricing. It is not a niche topic for multinationals. If you have two related companies in the UAE and money moves between them, the rules apply to you.

What Is Transfer Pricing and Why Does It Apply to You?

Transfer pricing is the process of setting prices for transactions between related parties. Related parties include parent companies, subsidiaries, sister companies under common ownership, or any entity where one party owns 50% or more of shares or controls the other.

Under Federal Decree-Law No. 47 of 2022 (the UAE Corporate Tax Law), all such transactions must be priced at arm’s length. Ministerial Decision No. 97 of 2023, issued by the Ministry of Finance, sets out the specific documentation requirements.

The logic is straightforward. If a mainland company (taxed at 9%) pays an inflated fee to its freezone affiliate (taxed at 0%), profit shifts out of the tax net. The FTA closes that gap by requiring that intercompany prices reflect what two unrelated parties would agree to in the open market.

Under Article 35 of the UAE Corporate Tax Law, related parties include:

A natural person who directly or indirectly owns 50% or more of shares in a company or controls it
One company (alone or together with its own related parties) owning 50% or more of another company

In practice, this covers most multi-entity structures that UAE founders build. A holding company and its operating subsidiary. A freezone entity and a mainland entity under the same shareholder. Two businesses owned by the same individual.

The transactions themselves can include goods, services, management fees, royalties, IP licences, loans and interest payments. If value is being transferred between related entities, it falls within the scope.

The Arm’s Length Principle, Explained Plainly

The arm’s length principle requires that your intercompany transactions are priced as if you were dealing with a completely unrelated party.

A practical example: your freezone entity charges your mainland company AED 180,000 per year in management fees. The FTA’s question is simple. Would your mainland company pay that amount to an outside firm for the same services? If the answer is yes and you can show evidence, you are compliant. If the answer is no, or you cannot show evidence, you have a problem.

The UAE follows OECD guidelines on transfer pricing methods. The most commonly used method in practice is the Transactional Net Margin Method (TNMM), which compares your net profit margin on controlled transactions to comparable independent companies. Other accepted methods include Comparable Uncontrolled Price (CUP), Cost Plus, Resale Price and Profit Split.

You do not need to use the most sophisticated method. You need to use the most appropriate one for your situation, and you need to document your reasoning.

Documentation Requirements and What Triggers Each Level

Not every founder needs to produce the same documentation. The UAE uses a tiered framework, aligned with OECD BEPS Action 13.

Tier 1: CT Return Disclosure (most founders above these thresholds)

If your total related party transactions exceed AED 40 million in a tax period, you must complete the Related Party Transactions Schedule as part of your Corporate Tax return. If any individual transaction category (goods, services, interest, etc.) exceeds AED 4 million on its own, that category must be disclosed separately.

These are the thresholds most founders in the AED 1-50 million revenue range need to watch.

Tier 2: Local File

Required if your revenue exceeds AED 200 million. The Local File contains a detailed functional analysis of your intercompany transactions and benchmarking studies that demonstrate arm’s length pricing. It does not need to be submitted with your CT return but must be provided to the FTA within 30 days of a formal request.

Tier 3: Master File and Country-by-Country Report

The Master File applies to members of multinational groups with global consolidated revenue above AED 3.15 billion. The Country-by-Country Report applies to MNE Groups headquartered in the UAE with the same AED 3.15 billion threshold.

One important exception: if all entities in your group are UAE-resident with no overseas entities, no Master File is required even if one entity exceeds AED 200 million standalone.

First full compliance period: For most businesses (January to December financial year), FY2024 was the first full tax period subject to these rules. The CT return was due by 30 September 2025.

Common Founder Scenarios

Management Fees Between Entities

This is the most common scenario and one of the FTA’s highest-scrutiny areas. A freezone company charged a management fee, paid by a mainland company. The mainland entity deducts it. The freezone entity pays 0% corporate tax on it. Result: taxable income moves from a 9% entity to a 0% entity.

For this to hold up under scrutiny, three things need to be in place. First, a written intercompany agreement that defines the services, scope and fees. Second, evidence that the services were actually provided (invoices, time records, deliverables). Third, a benchmarking analysis showing the fee is in line with what an independent provider would charge.

Without these, the FTA can disallow the deduction entirely.

IP Licensing Between Freezone and Mainland

If your freezone entity owns intellectual property and licenses it to your mainland company, a royalty payment flows from mainland (9%) to freezone (0%). The same arm’s length logic applies.

The FTA and OECD use the DEMPE framework to assess IP transactions: who is doing the Development, Enhancement, Maintenance, Protection and Exploitation of the IP? The entity that controls those activities is the one entitled to the IP return. If your freezone entity holds the IP but does nothing with it, a high royalty rate is hard to defend.

Licence agreements must exist. Rates must be benchmarked. IP ownership must be registered and reflect economic substance.

Intercompany Loans

A holding company lends funds to an operating subsidiary. No interest is charged. Under UAE transfer pricing rules, an interest-free loan between related parties without documented justification is non-compliant. The FTA expects the loan to carry an arm’s length interest rate reflecting the borrower’s credit risk and prevailing market rates.

Treasury and loan safe harbours based on UAE Central Bank reference rates may be available in specific circumstances. If you have intercompany loans in your structure, document the terms and confirm the interest rate is defensible.

What to Do Now If You Have Not Started

If your related party transactions are below AED 40 million and your individual categories are below AED 4 million, your immediate obligation is limited. But you should still document the basis for your intercompany pricing. The FTA can still query transactions that appear irregular, even without a formal documentation request.

If you cross the disclosure thresholds, here is where to start:

Map every transaction between your related entities: what is being transferred, at what price, in what volume.
For each transaction, confirm whether an intercompany agreement exists. If not, create one.
Assess whether your prices can be supported with market comparables. A basic benchmarking exercise using public databases is sufficient for many SME transactions.
Complete the Related Party Transactions Schedule in your CT return accurately. Missing or incomplete disclosure is itself a penalty trigger.
If your revenue is approaching AED 200 million, start building your Local File before the FTA asks for it.

For businesses with large recurring intercompany flows above AED 100 million, Advance Pricing Agreements (APAs) became available from Q4 2025 under FTA Decision No. 2 of 2025. An APA locks in an agreed pricing methodology for a defined period, removing uncertainty for those transactions.

Penalties Are Real

Non-compliance is not just a technical risk. The FTA can disallow non-arm’s-length deductions and raise a tax assessment for the difference. Administrative penalties for documentation failures can reach AED 50,000 per violation. Post-audit disclosures carry a fixed 15% penalty plus 1% per month. Intentional manipulation can be referred to criminal proceedings.

The more your structure routes profit from a 9% entity to a 0% entity, the more scrutiny you should expect.

The Underlying Point

Transfer pricing is not a compliance exercise reserved for large corporations. Any UAE founder with more than one entity and transactions between them needs to understand where they stand.

The good news is that most SME transfer pricing compliance is achievable with clear agreements, basic benchmarking and accurate CT return disclosure. You do not need a Big 4 team. You need a clear picture of your intercompany flows and a defensible basis for how you price them.

If your structure involves freezone and mainland entities, management fees, IP or intercompany financing, and you have not reviewed your transfer pricing position yet, now is the right time.

Lumea Finance works with UAE founders who need clarity on exactly this kind of question. If you would like to review your intercompany structure and make sure it holds up under FTA scrutiny, reach out here.