The full position
The tax treatment of related party transactions is governed by the arm’s-length principle, which is one of the more important and less intuitive parts of the UAE corporate tax regime for groups and owner-managed businesses to understand.
The issue the rules address is that connected persons (companies in the same group, an owner and their company, related individuals, associated entities) do not deal with each other at genuine market prices unless required to, because they share an interest. Left unchecked, this allows profit to be moved around: a group can charge inflated management fees from a profitable company to a loss-making or lower-taxed one, price intercompany sales to shift margin, or pay an owner an excessive salary to strip profit out. Each of these can reduce the overall tax paid without any change in the real economics. The arm’s-length principle prevents this by requiring related party transactions to be priced as they would be between independent parties dealing at arm’s length.
In practice this means that when connected persons transact, a management charge, an intercompany loan with its interest rate, a sale of goods or services between group companies, owner remuneration, a licence of intellectual property, a cost allocation, the price or terms must reflect what unrelated parties would have agreed in comparable circumstances. Where they do, the transaction is respected for tax. Where they do not, the FTA has the power to adjust the taxable profit to the arm’s-length position, effectively re-pricing the transaction for tax purposes and taxing the profit that should have been reported.
Alongside the pricing requirement sits a documentation dimension: businesses may be required to maintain transfer pricing documentation demonstrating that their related party transactions are at arm’s length, with the extent of the documentation depending on thresholds and the nature of the transactions. So related party transactions are treated by requiring arm’s-length pricing, backed by the FTA’s power to adjust, and supported by documentation obligations, the precise rules, thresholds and documentation requirements being set in the legislation and to be confirmed there.
What the arm’s-length principle requires
Related party transactions are respected for tax only where they meet the arm’s-length standard. This applies across the range of connected-party dealings:
- Management and service fees between group companies: priced as independent parties would agree
- Intercompany loans: at an arm’s-length interest rate and on arm’s-length terms
- Sales of goods or services between connected entities: at market prices
- Owner and related-party remuneration: a reasonable amount for the work genuinely done
- Intellectual property licences and royalties between connected persons: at arm’s-length rates
- Cost allocations and cross-charges within a group: on a defensible, arm’s-length basis
The common requirement is that each transaction be priced as it would be between independents. Where it is, it stands for tax; where it is not, the FTA can adjust the profit to the arm’s-length position. So the whole range of connected-party dealings has to be set, and be able to be shown, at market terms.
Why related parties are scrutinised
Related party transactions attract particular attention in the corporate tax regime, and understanding why explains both the rules and the FTA’s focus on them.
The reason is straightforward: related party transactions are the primary mechanism through which profit can be shifted to reduce tax, so they are where the risk of manipulation concentrates. An arm’s-length transaction between independents is self-policing, neither party will agree to a price against its own interest. A transaction between connected persons has no such discipline, because the parties share an interest and may prefer a price that reduces their combined tax over one that reflects market value. This makes related party pricing both a genuine risk area and a natural audit focus.
For a business, this means related party transactions are exactly the kind of position an audit examines, and a business that cannot demonstrate its intercompany charges, loans and owner remuneration are at arm’s length is exposed. Conversely, related party transactions that are genuinely at arm’s-length terms, and documented as such, are defensible. The scrutiny is not an accusation, legitimate businesses have extensive genuine related party dealings, but it does mean these transactions need to be got right and evidenced, rather than set casually within the group.
This connects to points made elsewhere: owner remuneration must be a reasonable arm’s-length amount; free zone qualifying status depends partly on transfer pricing compliance; and audits focus on related party dealings. The through-line is that the corporate tax regime takes related party transactions seriously because they are where profit shifting can happen, so it requires them to be at market terms and increasingly to be documented. A group or owner-managed business that treats its intercompany and owner dealings with this in mind, pricing them at arm’s length and keeping evidence, is in a sound position; one that sets them by convenience or to minimise tax without regard to market terms is exposed to adjustment.
Getting related party transactions right
For a business with related party transactions, which includes most groups and many owner-managed companies, handling them correctly means pricing them at arm’s length, documenting the basis, and being ready to support them.
The first task is to identify your related party transactions: charges and loans between group companies, owner and connected-person remuneration, intercompany sales and services, IP licences, cost allocations, and any other dealings with connected persons. The second is to ensure each is priced at arm’s length, the price or terms that independent parties would have agreed in comparable circumstances. For some transactions this is straightforward (a market interest rate, a market salary for the work); for others it requires analysis of comparable arrangements. The third is to document the basis, how the arm’s-length price was determined, to the extent required by the transfer pricing documentation rules, which depend on thresholds and the nature of the transactions.
The practical cautions are: do not set intercompany prices for tax convenience without regard to market terms, because the FTA can adjust them and the adjustment taxes the profit that should have been reported; do not overlook owner remuneration, a common related party transaction that must be reasonable; and do not neglect the documentation, since a transaction that is genuinely at arm’s length but cannot be shown to be is weaker than one that is documented. For free zone companies, transfer pricing compliance is also one of the QFZP conditions for the 0 per cent rate, so it has added importance.
Because transfer pricing is technical, is a genuine audit focus, and carries documentation obligations that depend on thresholds, it is an area where getting advice, particularly for groups with significant intercompany dealings, is worthwhile, both to price transactions correctly and to meet the documentation requirements. Handled properly, related party transactions are a normal, defensible part of group operations; handled without regard to arm’s-length pricing and documentation, they are one of the more significant corporate tax exposures a group can carry.
What trips people up
- Setting intercompany prices for tax convenience rather than at arm’s-length market terms.
- Assuming related party transactions are not scrutinised, when they are a natural audit focus.
- Overlooking owner remuneration as a related party transaction that must be reasonable.
- Not documenting the arm’s-length basis of intercompany dealings.
- Pricing intercompany loans without a market interest rate and arm’s-length terms.
- Neglecting transfer pricing where it is a QFZP condition for free zone 0 per cent.
- Treating a genuinely arm’s-length transaction as safe without evidence to show it.
How to act on this
- Identify all your related party transactions: charges, loans, remuneration, sales, IP, allocations.
- Price each at arm’s length: the terms independents would agree.
- Document the basis to the extent the transfer pricing rules require.
- Pay particular attention to owner remuneration and intercompany financing.
- Get advice for significant intercompany dealings and confirm documentation obligations.
Related questions
Frequently Asked Questions
How are related party transactions treated under UAE corporate tax?
They must be priced on an arm’s-length basis, transactions between connected persons (group companies, owners, related entities) must be at the price independent parties would agree. Where they are not, the FTA can adjust the taxable profit to arm’s-length terms. This transfer pricing principle applies to management fees, intercompany loans, owner remuneration and cross-charges.
What is the arm’s-length principle?
The requirement that transactions between connected persons be priced as they would be between independent parties dealing at arm’s length. It exists because related parties, sharing an interest, could otherwise price transactions to shift profit and reduce tax. The principle keeps intercompany dealings at genuine market terms for tax purposes.
Which transactions does this apply to?
The full range of connected-party dealings: management and service fees between group companies, intercompany loans and their interest rates, sales of goods or services between group entities, owner and related-party remuneration, IP licences and royalties, and cost allocations. Each must be at arm’s-length terms and able to be shown as such.
What happens if my prices aren’t at arm’s length?
The FTA has the power to adjust the taxable profit to the arm’s-length position, effectively re-pricing the transaction for tax and taxing the profit that should have been reported. So intercompany prices set for tax convenience rather than market terms are exposed to adjustment, which is why arm’s-length pricing matters.
Why are related party transactions scrutinised?
Because they are the primary mechanism through which profit can be shifted to reduce tax, an arm’s-length transaction between independents is self-policing, but connected-party pricing has no such discipline. This makes related party dealings a genuine risk area and a natural audit focus, so they need to be got right and evidenced rather than set casually.
Does owner remuneration count as a related party transaction?
Yes. A salary or other payment to an owner or connected person is a related party transaction that must be at an arm’s-length level, a reasonable amount for the work genuinely done. It is a common one, and an inflated owner salary paid to strip profit can be adjusted, so it should be set reasonably and documented.
Do I need to document related party transactions?
Increasingly, yes. There are transfer pricing documentation obligations whose extent depends on thresholds and the nature of the transactions. A transaction genuinely at arm’s length but not documented is weaker than one supported by evidence of how the arm’s-length price was determined. Confirm the documentation requirements that apply to you.
Does this matter for free zone companies?
Particularly, yes, transfer pricing compliance is one of the conditions for Qualifying Free Zone Person status and the 0 per cent rate. So for a free zone company, getting related party transactions at arm’s length and documented has added importance beyond the general requirement, because it affects eligibility for the favourable rate.
Should I get advice on transfer pricing?
For groups with significant intercompany dealings, yes. Transfer pricing is technical, is a genuine audit focus, and carries documentation obligations that depend on thresholds. Advice helps both to price transactions correctly and to meet the documentation requirements. Handled well, related party transactions are defensible; handled without regard to arm’s-length pricing, they are a significant exposure.
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Last reviewed 27 July 2026. Rates, thresholds and deadlines change, the e-invoicing provider deadline has already moved once. Confirm current requirements with the Federal Tax Authority before acting, or ask us to check your position.