UAE free zones: Why transfer pricing documentation is key

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The introduction of corporate tax in the UAE has brought with it a set of compliance obligations that free zone companies must now navigate carefully. Among the most important of these is adherence to transfer pricing requirements — rules that 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 critical.

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 laid out in Article 18 of the law. However, not every free zone business qualifies automatically, and not all income is eligible for the 0% rate.

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.

Transfer pricing rules are applicable 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.

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 emphasises 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.

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:

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.

Sameer Mishra is a senior journalist based in the UAE