What Is Transfer Pricing?

Transfer pricing refers to the price used when two companies with the same ownership or control buy or sell goods, services, assets, or even provide loans to each other, specifically if these companies are based in different countries. These companies are called Related Parties. Whenever we talk about Related Parties, the first impression that appears in our minds is a multinational group with several businesses. Yes, the companies under a multinational group fall under Related Party and Transfer Pricing criteria, but these related parties do not have to be part of a multinational company.

They can also be:

• Two separate companies owned by the same individual
• Companies controlled by the same family
• A business and its owner
• A company and its subsidiaries
• A company and its foreign or local branches

Whenever these related parties transact with each other, they must decide what price to use. That price is called the transfer price. Here are some simple examples:

• A person owns Company A (a trading business) and Company B (a logistics company). If Company B transports goods for Company A, the price charged is a transfer price.
• A family owns two restaurants under different company names. If one restaurant supplies ingredients to the other, that transaction involves transfer pricing.
• A business owner has a manufacturing company and a distribution company. When the manufacturer sells products to the distributor, the price must follow transfer pricing rules.

The Arm’s Length Principle (The Golden Rule)

The most important rule in transfer pricing is the Arm’s Length Principle. The Arm’s Length Principle says that Related parties must trade with each other as if they were independent companies.

This ensures:

• No special discounts
• No inflated prices
• No artificial shifting of profits

The price must be fair, similar to what unrelated companies would charge in the open market.

Why Does Transfer Pricing Matter?

Because different countries have different tax rates, rules, and costs. A company might be tempted to set prices in a way that reduces its tax obligations. For example, it might try to show more profit in a country with low taxes and less profit in a country with high taxes. Governments don’t like that and they want to make sure companies pay the right amount of tax without any artificial adjustments.

OECD and Global Transfer Pricing Rules

The OECD (Organization for Economic Co operation and Development) provides internationally accepted guidelines on transfer pricing. The OECD Transfer Pricing Guidelines explain:

• How to apply the arm’s length principle
• How to compare related party prices with market prices
• How companies should document their transfer pricing decisions

Many countries, including the UAE, follow these guidelines to ensure consistency and fairness.

Connected Persons (UAE Corporate Tax Context)

The UAE Corporate Tax Lawalso uses the term Connected Persons, which is slightly different from related parties. A Connected Person includes: The owner of the business / Directors / Partners / Family members of the owner (up to 4th degree) / Anyone who has significant influence over the business.

In the UAE, salaries paid to connected persons must also follow arm’s length principles. This means:

• The salary must be reasonable
• It must reflect the actual work performed
• It should match what an independent employee would earn for the same job

For example, if the owner’s sister works as an HR manager, the company cannot pay her an unusually high salary just to reduce taxable profit. The salary must match market rates for an HR manager in the UAE.

Transfer Pricing Under UAE Corporate Tax

The UAE introduced Corporate Tax (CT) in June 2023, and transfer pricing is a key part of the system.

UAE Requires Arm’s Length Pricing

The UAE Corporate Tax Law requires all related party transactions and all connected person payments to follow the Arm’s Length Principle, aligned with OECD guidelines.

UAE Documentation Requirements

Companies may need to prepare:

• ‍Master File – describes the entire group‍
• Local File – explains the UAE entity’s related party transactions

These are required if the company meets certain thresholds.

Transfer Pricing Disclosure Form

Every year, companies meeting a certain threshold must submit a Transfer Pricing Disclosure Form with their tax return, listing:

• All related parties
• All related party transactions
• Whether documentation exists

This helps the Federal Tax Authority (FTA) identify high risk cases.

Transfer Pricing made simple, if you’re unsure how this applies to your business, feel free to reach out. We’ll walk you through it and can also support you in preparing your transfer pricing documentation, including Master and Local Files.

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