UAE Free Zones: The Essential Guide to Transfer Pricing Documentation

Understanding Transfer Pricing and Corporate Tax Compliance in UAE Free Zones

The introduction of corporate tax in the United Arab Emirates has introduced a range of compliance obligations that free zone companies must now carefully navigate. Among these, adherence to transfer pricing requirements stands out as a crucial factor. These rules govern how businesses price transactions between related parties or connected persons. For companies aiming to benefit from the 0% corporate tax rate, understanding and fulfilling these obligations is essential.

Under the UAE Corporate Tax Law, qualifying free zone companies — referred to as Qualifying Free Zone Persons (QFZPs) — can enjoy a preferential 0% corporate tax rate, provided they meet certain conditions. One of these is strict compliance with transfer pricing principles as outlined in Article 18 of the law. However, not every free zone business qualifies automatically, and not all income is eligible for the 0% rate.

What is Transfer Pricing?

Transfer pricing refers to the pricing of transactions between entities that are under common control or ownership — known as related parties or connected persons. These transactions can involve goods, services, intangibles, financial arrangements, or dealings involving a permanent establishment.

Johnson M. George, General Manager of Umm Al Quwain Free Trade Zone, highlights that transfer pricing is no longer a back-office compliance task: it’s a strategic imperative. UAE free zones must ensure that their businesses, especially those engaged in cross-border transactions, have robust, transparent documentation aligned with OECD standards. At UAQ Free Trade Zone, we are proactively guiding our registered entities to navigate these evolving tax expectations with confidence, ensuring both regulatory compliance and operational resilience.

Key Principles of Transfer Pricing

Transfer pricing rules apply to related parties, as defined under Article 35 of the UAE Corporate Tax Law. Related parties include any associated individuals or entities based on a defined level of connection. This connection can stem from a pre-existing relationship through kinship (in the case of natural persons), ownership, or control, regardless of whether the other person resides in the UAE or not.

The rationale behind transfer pricing rules is to prevent profit shifting — where income is artificially moved to jurisdictions with lower tax rates. To avoid this, companies must price transactions with related parties as if they were dealing with an independent third party. This is known as the arm’s length principle.

These rules apply not only to international transactions but also to domestic dealings between related parties or connected persons, including transactions between entities in different UAE free zones.

The Role of the Federal Tax Authority

In October 2023, the UAE’s Federal Tax Authority (FTA) released a comprehensive transfer pricing guide. This document aligns UAE tax practices with the OECD’s globally accepted transfer pricing guidelines and outlines how businesses should document their pricing policies.

The guide emphasizes that while intra-group pricing might not affect a company’s overall profit on a consolidated basis, the pricing of its controlled transactions (a transaction or arrangement between related parties or connected persons) can lead to tax mismatches across jurisdictions.

Documentation Requirements for Free Zone Companies

Article 55 of the UAE Corporate Tax Law outlines the transfer pricing documentation requirements for taxable persons who engage in transactions with related parties or connected individuals. Transfer pricing documentation typically includes a collection of records created by taxable persons to show their adherence to the arm’s length principle in transactions with related parties. The primary purpose of this documentation is to give the Federal Tax Authority (FTA) a clear and thorough understanding of the taxable person’s transfer pricing policies and how they are applied. This allows the FTA to evaluate the transfer pricing outcomes for each relevant review period.

The UAE corporate tax legislation outlines five key types of transfer pricing documentation that may be required:

• Transfer Pricing Disclosure Form: Covers details of the controlled transactions during a tax period.
• Master File: Provides a high-level overview of the entire group’s global operations, income distribution, and economic activities. It is required for large businesses, as defined under Ministerial Decision No. 97 of 2023.
• Local File: Offers a deeper dive into the operations of the local entity, analysis of the outcomes of the controlled transactions against the arm’s length principle.
• Country-by-Country Report: Applicable to multinational groups with global revenues above AED 3.15 billion, as well as an overview of the different activities conducted by affiliates of the group.
• Additional Information as requested by the FTA.

It is important to note that entities that are exempt or have chosen small business relief, as well as standalone entities without related party transactions, must comply with transfer pricing rules and adhere to the arm’s length principle for controlled transactions. However, they are not required to prepare or maintain transfer pricing documentation.

Additional Considerations

Understanding the intricacies of transfer pricing is vital for free zone companies looking to maintain compliance and take full advantage of the 0% corporate tax rate. As the landscape continues to evolve, staying informed and proactive is key to long-term success. From navigating the arm’s length principle to preparing the necessary documentation, companies must remain vigilant in their approach to transfer pricing.