20 August 2026 · Arm's length
The Arm's Length Principle in UAE Transfer Pricing
Under UAE corporate tax, Article 34 of Federal Decree-Law No. 47 of 2022 requires every transaction between related parties and connected persons — goods, services, financing, royalties, IP licensing and management charges — to be priced as if the parties were independent. If your intra-group pricing does not meet this standard, the FTA can raise a transfer pricing adjustment that increases your taxable income, with corporate tax and penalties charged on the difference. You demonstrate compliance by selecting the most appropriate of the five OECD-recognised methods for each transaction and supporting it with a benchmarking study against comparable independent dealings, refreshed as facts and markets change.
Exiloz Management & Tax Consultant · Dubai-based FTA-focused advisory · VAT, corporate tax & accounting
What arm's length actually means
The test is simple to state and harder to prove: your intra-group price must match what unrelated parties would have agreed in the same circumstances. It is set out in Article 34 of the Corporate Tax Law and reaches every category of intra-group dealing, not only cross-border ones — a UAE-to-UAE transaction between related companies is caught just as much as one crossing a border. The burden of proof sits with the taxpayer, so the absence of a benchmarking study is treated much the same as pricing that fails the test outright.
- Applies to transactions with related parties and connected persons.
- Covers goods, services, financing, IP and management charges.
- Reaches domestic UAE-to-UAE deals, not only cross-border ones.
- The FTA can adjust income where pricing is not arm's length.
- The burden is on you to show the price is defensible.
- No benchmarking study on file is treated as a failed test.
Choosing a transfer pricing method
The UAE follows the five OECD-recognised methods rather than inventing its own. The right one depends on the nature of the transaction, the functions and risks of each party, and what genuine comparable data is actually available. Method choice is not a formality — using TNMM where a direct CUP comparable exists, or the reverse, is itself a common reason a benchmarking study gets challenged on review.
- Comparable Uncontrolled Price (CUP) — strongest where a genuine comparable exists.
- Resale Price Method — for distributors that add little value before resale.
- Cost Plus Method — common for contract manufacturers and back-office services.
- Transactional Net Margin Method (TNMM) — the workhorse for UAE intra-group services.
- Profit Split — for integrated or IP-heavy operations.
- The method must match the facts, not just be the easiest to apply.
How a benchmarking study is actually built
A benchmarking study starts with a functional analysis: what each party actually does, what assets it uses and what risks it carries, because pricing follows function and risk before it follows anything else. From there you identify the “tested party” — usually the simpler side of the transaction — and search for comparable independent companies or transactions to establish an arm's length range. Exiloz builds this analysis first and lets it point to the method, rather than picking a method and working backwards to justify it.
- Functional analysis of what each party does, owns and risks.
- Selection of the tested party — typically the less complex side.
- A search for genuinely comparable independent transactions or companies.
- An arm's length range, not a single fixed price.
Common arm's length mistakes we see
Most disputes do not start with a dishonest price; they start with a missing or stale benchmarking study. Groups often apply one method to every transaction regardless of fit, or run a benchmarking study once at setup and never refresh it as margins, markets or group structure change. Others confuse having a signed intercompany agreement with having actual evidence the price inside that agreement is arm's length.
- No benchmarking study, or one that is years out of date.
- The same method applied to every transaction regardless of fit.
- A signed agreement mistaken for proof the price is arm's length.
- No functional analysis behind the chosen tested party.
Related guides
Frequently Asked Questions
For UAE groups pricing intra-group transactions and preparing to defend those prices under FTA review.
What is the arm's length principle?
It requires related-party and connected-person transactions to be priced as if the parties were independent, so profit is not artificially shifted between group entities or out of the UAE tax base. It is set out in Article 34 of the Corporate Tax Law and applies to every category of intra-group dealing.
Which transfer pricing methods are allowed in the UAE?
The five OECD methods: Comparable Uncontrolled Price, Resale Price, Cost Plus, TNMM and Profit Split. You choose whichever is most appropriate to the transaction's facts, functions and available comparables, and document why.
What if my pricing is not arm's length?
The FTA can make a transfer pricing adjustment that increases your taxable income, with corporate tax at 9% and potential penalties charged on the difference. The exposure compounds the longer a mispriced arrangement runs unchanged.
Do I need a benchmarking study for every transaction?
In practice, yes for every material related-party transaction — immaterial or low-value dealings can sometimes be supported more lightly, but there is no blanket exemption. The depth of the study should match the size and risk of the transaction.
Which method should I use for a management fee versus a sale of goods?
Management and service fees are usually tested with Cost Plus or TNMM, since a direct market price rarely exists for them. Goods transactions more often support a CUP comparison if a genuine independent price for the same item is available.
Does the arm's length principle apply to free zone companies?
Yes. Qualifying Free Zone Person status affects the tax rate on qualifying income, not the requirement to price related-party transactions at arm's length — that obligation applies regardless of where in the UAE the entity is based.
How often should a benchmarking study be refreshed?
Treat it as a living document rather than a one-off exercise — refresh it when margins, markets or group structure move materially, and revisit it at least around each corporate tax filing cycle rather than leaving it from the year the arrangement started.
Can Exiloz set arm's length prices for us?
Yes. We review your related-party dealings, run the functional analysis, select the right method and build the benchmarking study that supports the pricing, so it stands up if the FTA asks for it.
Get your intra-group pricing right
Exiloz benchmarks your related-party transactions against genuine comparables, so the price you have used stands up to FTA review rather than being assumed correct.