🔍 What Is Arm’s Length Pricing under UAE Corporate Tax?

Arm’s Length Pricing is a principle used in Transfer Pricing (TP) under UAE Corporate Tax law. It ensures that transactions between related parties (e.g., subsidiaries, shareholders, family-owned entities) are conducted as if they were between independent, unrelated parties in the open market.

In simpler terms, the price or terms you set when dealing with a related entity must be the same as what you’d offer to an independent third party.

📜 Legal Basis in UAE

Under Federal Decree-Law No. 47 of 2022 (UAE Corporate Tax Law), any transactions between related parties or connected persons must comply with the arm’s length principle, consistent with OECD Transfer Pricing Guidelines.

👥 When Does It Apply?

Arm’s Length Pricing applies when:

• You have transactions with related parties, such as:
  • Parent-subsidiary companies
  • Shareholders or partners and their companies
  • Directors and their affiliated entities
  • Family-owned businesses with intercompany dealings
• You engage in:
  • Sale/purchase of goods
  • Provision of services
  • Financing arrangements
  • Licensing of intellectual property
  • Intercompany cost sharing

✅ Key Transfer Pricing Methods

To test whether your related party transactions are at arm’s length, you can use one of the five OECD-approved methods:

1. Comparable Uncontrolled Price (CUP) Method
   Compares the price charged to a related party with the price charged to an independent party.
2. Resale Price Method
   Based on the price a related party sells to a third party, minus a normal profit margin.
3. Cost Plus Method
   Adds an appropriate markup to the costs incurred by the supplier.
4. Transactional Net Margin Method (TNMM)
   Compares the net profit margin relative to an appropriate base (like sales or assets).
5. Profit Split Method
   Divides combined profits from interrelated transactions between parties based on their contributions.

📄 Documentation Requirements

If your business engages in related party transactions, you may need to prepare:

• Transfer Pricing Disclosure Form (mandatory for many businesses)
• Master File and Local File (required if you cross revenue/transaction thresholds—AED 200M for consolidated revenue and AED 50M for related-party transactions)

All records must demonstrate how arm’s length pricing was determined.

⚠️ Penalties for Non-Compliance

🧠 Example

Let’s say:

• A UAE company sells goods to its Indian subsidiary for AED 100 per unit.
• The same goods are sold to a third party for AED 140 per unit.

👉 This may not meet arm’s length standards. The FTA could adjust the price to AED 140 for tax purposes, increasing the UAE company’s taxable income.

📌 Summary: Arm’s Length Principle in UAE CT

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