🎧 Listen to This Article
As the UAE’s first full corporate tax filing deadline approaches this June, thousands of companies are beginning to navigate the complexities of compliance. While many are rushing to gather documents and finalize financials, a common and potentially costly area of confusion is coming into sharper focus: arm’s length pricing.
The issue seems straightforward. Can you sell the same product at different prices to different buyers without impacting your tax liability? The short answer: you can, but it may have tax consequences. Here’s why.
What Is the Arm’s Length Principle and Why Does It Matter?
In tax terms, an arm’s length transaction is one where the price charged between parties reflects what two independent, unrelated businesses would charge each other under normal market conditions. This principle is crucial in ensuring that profits are accurately reported and taxed where they are earned.
Under the UAE’s new corporate tax framework, which follows global standards set by the OECD, related party transactions must adhere to arm’s length principles to prevent profit shifting or artificial price manipulation.
Imagine a company selling the same item to a stranger for AED 1,000 and to a family member for AED 400. Even if this appears innocent or generous, it raises a flag with tax authorities. The concern is whether the discount was applied to reduce the overall tax burden, primarily if the lower-paying customer is based in a jurisdiction with lower or no corporate tax.
Family, Friends and Fuzzy Lines of Relationship
You may ask: “Isn’t it my right to sell to my cousin or best friend at whatever price I choose?” Technically, yes. However, the burden is on you to prove that your pricing practices do not distort taxable profits.
The definition of a “related party” under UAE tax law is broad. It includes:
- Direct family relationships (parents, children, siblings, spouses)
- Extended relatives (grandparents, grandchildren, cousins)
- Connected entities where control or significant influence exists
Friendship, while harder to define, can still trigger scrutiny. If auditors find pricing discrepancies between known acquaintances, and those differences are material, you may have to justify them or face adjustments and possibly penalties.
Best practice: treat all transactions, regardless of who the buyer is, as if they were with a third-party document pricing policies and rationale.
What Happens If You Get It Wrong?
If your business is audited and inconsistent pricing is flagged, several outcomes are possible:
- Tax Adjustments – Authorities may adjust your taxable income based on what the price “should have been,” increasing your tax bill.
- Penalties – Non-compliance with arm’s length principles could result in fines or other enforcement actions.
- Reputational Risk – Future dealings with banks, investors, or regulators could be negatively affected by any findings of impropriety.
The UAE’s corporate tax regime is designed not to penalize businesses unnecessarily but to ensure fairness and transparency. However, ignorance or informal practices are no longer valid defenses in an increasingly digitized and regulated environment.
Business Relocation and Cross-Border Considerations
Another area often overlooked is what happens when a business owner relocates to the UAE and replicates operations previously based abroad. This move introduces two critical layers of compliance:
1. Individual Tax Migration
Moving to the UAE doesn’t mean you immediately lose tax obligations in your home country. Many countries have “exit taxes” or require you to prove that you are no longer a resident for tax purposes, which often involves spending fewer than a specific number of days there yearly.
2. Corporate Migration
If your business operations shift to the UAE either as a continuation or a fresh start, you may trigger a deemed sale of assets or require dual reporting for cross-border transactions. If both entities (the original and the UAE-based one) continue to operate and trade with each other, arm’s length pricing rules apply here, too.
This is especially complex when:
- Staff or management work across both entities
- The same customers are served through two legal entities
- Intellectual property or inventory is shared or transferred
In such scenarios, professional tax structuring and transfer pricing documentation are not just helpful. They’re essential.
The Bottom Line: Transparency Over Tactics
While offering friends and family a deal or shifting pricing between entities to manage profit margins may be tempting, doing so without documentation or justification can put your entire tax position at risk.
One thing is clear in the UAE’s new corporate tax landscape: consistent, arm’s length pricing isn’t just good practice. It’s a legal requirement.
As the filing deadline draws near, businesses should:
- Review all related-party transactions for arm’s length compliance
- Avoid differential pricing unless thoroughly documented
- Seek professional advice, especially when operating across borders
Tax compliance is no longer just an annual formality. It’s now part of the everyday mechanics of running a responsible and sustainable business in the UAE.
For further details, clarification, contributions, or any concerns regarding this article, please get in touch with us at editorial@tax.news. We value your feedback and are committed to providing accurate and timely information. Please note that our privacy policy will handle all inquiries.
