As the UAE’s corporate tax landscape matures, small and medium-sized enterprises (SMEs) face new rules that can seem daunting at first glance. One of the most important-and often misunderstood-areas is transfer pricing. If you’re an SME owner or manager, understanding what’s required in 2025 is essential to stay compliant, avoid penalties, and keep your business running smoothly.
This blog will break down transfer pricing in simple terms, explain why it matters, detail the 2025 requirements, and offer practical steps for SMEs, complete with examples.
What Is Transfer Pricing, and Why Does It Matter?
Transfer pricing is about how you set prices for goods, services, or loans exchanged between your business and related parties-for example, between your main company and a subsidiary, or between sister companies owned by the same group. The UAE’s new corporate tax regime requires these transactions to be priced as if they were between independent, unrelated companies-a principle called the arm’s length principle[8][12].
Why is this important?
If related companies set prices that are too high or too low, they could shift profits to jurisdictions with lower taxes, reducing their overall tax bill. The UAE’s transfer pricing rules are designed to prevent this and ensure profits are taxed where the real economic activity happens.
The Legal Framework: What Changed in 2025?
Historically, the UAE was known for its zero or very low taxes. That changed with the introduction of a 9% corporate tax (CIT) for most businesses, effective for financial years starting on or after June 1, 2023. In 2025, the UAE has fully aligned with global standards by enforcing detailed transfer pricing regulations, including documentation requirements.
Key laws and decisions:
– Federal Decree-Law No. 47 of 2022 (Corporate Tax Law)
– Cabinet Decision No. 85 of 2023
– Ministerial Decision No. 120 of 2023
– Ministerial Decision No. 97 of 2023 (on documentation)
Who Needs to Worry About Transfer Pricing in 2025?
All UAE businesses that have transactions with related parties-whether within the UAE or across borders-must comply with the arm’s length principle. However, detailed documentation requirements only apply if:
– Your UAE business has at least AED 200 million in revenue in the relevant tax period, OR
– You are part of a multinational group with total consolidated revenues of at least AED 3.15 billion in the relevant period[6].
If you’re below these thresholds:
You still need to ensure your related-party transactions are at arm’s length, but you may not need to prepare the full set of transfer pricing documentation. However, you should be ready to explain your pricing if the Federal Tax Authority (FTA) asks.
What Documentation Is Required?
If you meet the thresholds above, you must maintain three main documents:
- Transfer Pricing Disclosure Form
– A summary of all related-party transactions during the tax period.
– Submitted with your annual tax return.
- Master File
– Describes the overall business operations, structure, and global transfer pricing policies of your group.
– Required if your group’s revenue is AED 3.15 billion or more.
- Local File
– Details each relevant transaction between your UAE business and related parties.
– Includes contracts, economic analysis, and evidence that prices are at arm’s length.
– Required if your UAE business revenue is at least AED 200 million.
Example:
A Dubai-based SME with AED 250 million in annual revenue sells products to a related company in Saudi Arabia. They must prepare a local file showing how the sale price was determined and why it’s comparable to prices charged to independent customers.
What Transactions Are Covered?
Transfer pricing rules apply to a wide range of transactions between related parties, including:
– Sale or purchase of goods
– Provision of services (e.g., management fees, IT support)
– Loans and financing arrangements
– Use or transfer of intellectual property (e.g., trademarks, patents)
Example:
If your UAE company provides a loan to a subsidiary at a low interest rate, you must show that the rate is similar to what an independent bank would charge.
How Do You Prove Your Prices Are “Arm’s Length”?
The UAE follows the OECD Transfer Pricing Guidelines and recognizes five main methods to test if your prices are arm’s length[8]:
- Comparable Uncontrolled Price (CUP) Method: Compare your price to what independent companies pay for similar transactions.
- Resale Price Method (RPM): Start with the resale price to an independent party, subtract a reasonable profit margin.
- Cost Plus Method (CPM): Add a fair profit margin to your costs.
- Profit Split Method (PSM): Split profits based on each party’s contribution.
- Transactional Net Margin Method (TNMM): Compare your net profit margin to those of similar independent businesses.
Choosing the best method depends on your industry, the type of transaction, and available data.
Practical Steps for SMEs in 2025
- Map Your Related-Party Transactions
– List all transactions with group companies or related parties, both in the UAE and abroad.
- Assess Documentation Requirements
– Check if your revenue meets the AED 200 million threshold.
– If yes, prepare a local file and transfer pricing disclosure form.
– If part of a large group, prepare a master file as well.
- Gather Evidence
– Keep contracts, invoices, and benchmarking studies that show how your prices were set.
– Document the economic reasons for your pricing.
- Align with Other Compliance Requirements
– Make sure your transfer pricing policies align with customs valuations and Economic Substance Regulations (ESR) if applicable.
- Review and Update Regularly
– Update your documentation annually or whenever there’s a major change in your business.
- Seek Professional Advice
– Consider consulting a tax advisor, especially if you have complex or high-value transactions.
What Happens If You Don’t Comply?
Failure to maintain proper transfer pricing documentation can lead to:
– Penalties and fines
– Transfer pricing adjustments (the FTA can increase your taxable income)
– Increased risk of audit and scrutiny by the FTA.
Example:
A UAE SME that fails to justify a low price charged to a related party may see its taxable profit increased by the FTA, resulting in a higher tax bill and penalties.
What’s New and What’s Next?
The UAE is expected to introduce an Advance Pricing Agreement (APA) programme in late 2025 or 2026. This will allow businesses with complex transactions to agree on transfer pricing methods with the FTA in advance, reducing audit risk and uncertainty.
Common Mistakes and How to Avoid Them
– Ignoring low-value transactions: Even small transactions must be at arm’s length.
– Using outdated benchmarks: Update your comparables regularly.
– Not documenting services: Even management fees or IT support must be justified.
– Assuming exemptions: Just because you’re below the documentation threshold doesn’t mean you can ignore the arm’s length principle.
Conclusion
Transfer pricing isn’t just for global giants-UAE SMEs must also pay close attention in 2025. By understanding the rules, documenting your related-party transactions, and keeping your pricing fair and transparent, you’ll avoid penalties and keep your business on the right track.
Key takeaways:
– Know your thresholds (AED 200 million for local file, AED 3.15 billion for master file).
– Always apply the arm’s length principle.
– Keep clear, up-to-date documentation.
– Seek expert help if you’re unsure.
By following these steps, SMEs can turn transfer pricing compliance from a headache into a business advantage-building trust with authorities and partners, and supporting long-term growth in the UAE’s dynamic market.
For more guidance or tailored support, reach out to a qualified UAE tax consultant. Staying proactive today means fewer surprises tomorrow.
