Arm's length principle: what it means in UAE tax.

What arm's length principle means

Also called: Arm's length standard, Arm's length price.

The arm's length principle is the test at the centre of UAE transfer pricing. A deal between Related Parties passes if its result matches what unrelated businesses would have agreed for a similar deal in similar circumstances. The rule is in Article 34 of the Corporate Tax Law.

The law does not ask for one perfect price. It lists five recognised methods, lets the business use another method where none of the five can reasonably work, and accepts that the answer is often a range. If the result falls inside the arm's length range, it stands. If it falls outside, the Federal Tax Authority adjusts Taxable Income to the result that best fits the facts.

For an SME, this is the practical question behind every related deal: rent paid to an owner's other company, goods bought from a sister firm, a loan from a shareholder. If an outsider would not have paid that price, expect an adjustment. The wider regime, including documentation, is covered on the transfer pricing page.

How it works

• The five listed methods are comparable uncontrolled price, resale price, cost plus, transactional net margin and transactional profit split (Article 34(3)).
• The choice of method must follow the most reliable method, looking at contract terms, the nature of the deal, economic conditions, functions, assets and risks, and business strategies (Article 34(5)).
• Applying a method may produce an arm's length range rather than a single figure (Article 34(7)); the FTA transfer pricing guide accepts the interquartile range as an appropriate way to set that range.
• Where the result is outside the range, the Authority adjusts Taxable Income (Article 34(8)) and makes a matching adjustment for the UAE Related Party on the other side (Article 34(10)).

Worked example

A Sharjah IT company provides support services to a related company in the same group and charges cost plus 2%. A benchmarking study of independent service firms gives an interquartile range of 5% to 10% mark-up, with a median of 7%. For illustration, the adjustment is made to the median.

Cost of services provided	AED 1,000,000
Price charged at cost plus 2%	AED 1,020,000
Price at median mark-up of 7%	AED 1,070,000
Upward adjustment to Taxable Income	AED 50,000

A price below the range is lifted to an arm's length point; a price inside the 5% to 10% range would have been accepted.

Common mistakes

• Charging a related company at cost, with no mark-up, for services that an independent provider would sell at a profit.
• Choosing a method because it gives the lowest tax, rather than because it is the most reliable for the facts.
• Relying on comparables from very different markets or years without adjusting for the differences.

The law

• Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, Article 34 (Arm's Length Principle)

Frequently asked questions

Does the FTA always adjust to the median?

No. Article 34(8) says the Authority adjusts to the arm's length result that best reflects the facts and circumstances. Any point inside the range is acceptable if the price already falls within it.

Can a business use a method that is not on the list?

Yes, but only if it can show that none of the five listed methods can reasonably be applied and that its chosen method still gives an arm's length result (Article 34(4)).

Related terms

Transfer pricing · Related party · Connected person · Taxable income. See every term in the UAE tax glossary.

For the full picture, read our guide: Transfer Pricing Basics for UAE SMEs That Deal With Their Own Owners.

Need help with Corporate Tax filing? See our Corporate Tax filing service.