Transfer Pricing in the UAE: Why SMEs Must Rethink Related-Party Transactions

For many small and medium-sized enterprise (SME) owners, it is common practice to move funds freely between different businesses they own, or to pay a salary to a family member who helps manage the company. Before the introduction of UAE Corporate Tax, these internal transactions went largely unnoticed. Today, they are subject to strict scrutiny under Transfer Pricing (TP) rules.

Transfer Pricing is no longer just a concern for multinational conglomerates. If your SME engages in transactions with "Related Parties" or "Connected Persons," you must legally prove that those transactions were conducted fairly. Failing to do so can lead to severe tax adjustments and penalties from the Federal Tax Authority (FTA).

The "Arm’s Length" Principle Explained

At the core of the UAE's Transfer Pricing regulations is the Arm’s Length Principle. This rule states that the price of any transaction between related parties must be the same as if the transaction had occurred between two completely independent businesses in the open market.

"If you own a consulting firm and a real estate company, you cannot artificially lower the consulting firm's tax burden by having it pay inflated management fees to your real estate company."

The FTA monitors these transactions to ensure businesses are not shifting profits to avoid paying their fair share of Corporate Tax. If an auditor determines a transaction was not at arm's length, they have the authority to adjust your taxable income accordingly.

Who Are "Related Parties" and "Connected Persons"?

SMEs often assume that TP rules do not apply to them. However, the FTA defines these relationships broadly. You must monitor transactions involving:

• Shareholders and Directors: Payments, loans, or salaries made to the business owners or key management personnel.
• Family Members: Salaries or contractor fees paid to relatives of the business owner (up to the fourth degree of kinship).
• Sister Companies: Transactions between two or more companies that share the same ultimate ownership or control.

How to Protect Your SME

You do not necessarily have to stop related-party transactions, but you must formally document them. SMEs need to draft inter-company agreements and maintain clear records explaining how the pricing was determined based on market rates. A simple benchmark study can save you from a complex tax audit.