Transfer pricing scares founders because the literature is written for groups with 200-page master files. For an owner-managed cross-border pair (one UK Ltd and one UAE FZE, both under the same family ownership), the rules are the same in principle but the practical answer fits on one page. Here is that one page.
When the rules actually apply
The UAE Corporate Tax law applies the arm's-length principle to all transactions between Related Parties and Connected Persons, regardless of group size. Related Parties include UAE-resident entities under common control (50%+) and natural persons who control either party.
So the moment your UK-owned UAE FZE invoices a UK Ltd you also own (or vice versa, or your UK Ltd invoices a Bahrain entity you also own), arm's-length pricing applies on the UAE side. Pricing has to be supported by an OECD-recognised method and documented.
The three thresholds you should actually remember
| Threshold | Triggers |
|---|---|
| Any related-party transaction | Arm's-length pricing applies. Report on CT return Schedule. |
| Revenue > AED 50M (UAE entity) | Disclosure form on the CT return. Higher detail than the basic schedule. |
| Group revenue > AED 200M (UAE entity is part of an MNE group) | Master File and Local File must be maintained and produced within 30 days of FTA request. |
Owner-managed groups almost always sit in the first row. The arm's-length obligation applies, but you are not required to maintain a master file. That said, "you do not need a master file" is not the same as "you can pick any number". The pricing has to be defensible.
The five OECD methods, in plain English
- Comparable Uncontrolled Price (CUP). Find a third-party price for the same thing. Best for commodities, software licences with public price lists.
- Resale Price Method. Take the third-party resale price, subtract a routine distributor margin.
- Cost Plus. Take the cost, add a routine mark-up. Useful for routine service entities.
- Transactional Net Margin (TNMM). Compare net margin to a basket of comparable independent companies. The workhorse method.
- Profit Split. Allocate combined profit by contribution. Used for integrated businesses where neither side is routine.
For SME owner-managed pairs, TNMM (or Cost Plus for a back-office services FZE) is the right answer 80% of the time.
The one-page approach we use for SME groups
- Functional analysis. Write down what each entity does, what assets each uses, what risks each bears. Half a page is enough for a two-entity pair.
- Pick the tested party. Usually the simpler one (the back-office services entity, the routine distributor). Test that party's margin against a benchmark.
- Benchmark. Use a commercial database (Bureau van Dijk Orbis, RoyaltyStat for IP) or a published study. For services, a 5% to 10% cost-plus mark-up is a defensible starting position. For routine distribution, 2% to 5% net margin on revenue.
- Document the result. One memo per related-party flow, identifying the method, the benchmark range, and the price set.
- Review annually. Update the benchmark every 3 years; refresh the financial application annually.
Do not try to invent a transfer pricing study from scratch in Excel. Either buy 2 hours of a TP consultant's time for a starter memo, or use an accountancy firm that includes a TP review in the audit. AED 10,000 to AED 20,000 for the first year, half that in subsequent years. Cheaper than a CT enquiry adjustment.
What gets scrutinised
The FTA has been actively reviewing related-party flows since 2024. The patterns that draw queries:
- Management fees from UAE FZE to overseas parent (or vice versa) at round numbers (USD 5,000 a month, AED 100,000 a quarter).
- Royalty payments to a non-UAE related party with no clear IP underpinning.
- Cost allocations that move profit out of UAE at year-end with no contemporaneous documentation.
- Inter-company loans with no written agreement, no interest rate, no repayment schedule.
None of these are inherently wrong. All of them invite a query if undocumented. The fix is always the same: write a one-page memo before you book the journal entry, not after the FTA asks for it.