Transfer pricing for UAE free zone companies: what a Qualifying Free Zone Person must document
Understand transfer pricing in UAE free zones, including arm's length records, return disclosures, file thresholds and risks to 0% status.
The 0% rate for qualifying free zone income does not exempt a company from UAE transfer pricing rules. A Qualifying Free Zone Person (QFZP) must apply the arm’s length standard to transactions with Related Parties. The Article 36 deduction limit for payments or benefits to a Connected Person applies on the conditions set out below. The QFZP must also keep records that support those prices. Separate size tests govern master and local files; those tests do not limit the pricing rule.
If a founder lends to the free zone company, a CFO allocates head-office costs or a family office licenses assets across a group, the price should reflect what each entity does. A licence, invoice or group policy cannot establish that alone.
Why transfer pricing affects the 0% free zone rate
Federal Decree-Law No. 47 of 2022 allows a QFZP to apply 0% Corporate Tax to Qualifying Income. Other taxable income is taxed at 9%. A QFZP does not get the 0% rate on the first AED 375,000 of Taxable Income that applies to other businesses. Cabinet Decision No. 100 of 2023 sets out what counts as Qualifying Income and the substance and de minimis rules. Ministerial Decision No. 229 of 2025 lists the Qualifying Activities and Excluded Activities and the extra QFZP conditions. Classify the income separately from assessing its arm’s length price.
QFZP conditions include maintaining adequate substance in the free zone, deriving Qualifying Income, not electing to be taxed at the standard rates, complying with the arm’s length and transfer pricing documentation rules (Articles 34 and 55), meeting the de minimis requirements and preparing audited financial statements.
Article 34 of the Corporate Tax Law applies the arm’s length standard to transactions with Related Parties. Under Article 36, a payment or benefit to a Connected Person is deductible only to the extent it matches Market Value and is incurred wholly and exclusively for the business, tested using Article 34. Companies listed on a recognised stock exchange and businesses regulated by a UAE competent authority are outside that Article 36 limit. Article 55 covers transfer pricing documentation: a disclosure filed with the return in the form the FTA sets, a master file and local file where Ministerial Decision No. 97 of 2023 applies, and any other information supporting arm’s length pricing. Files and information must be handed over within 30 days of an FTA request, or by a later date the FTA directs.
If a QFZP fails any condition at any time in a tax period, including the transfer pricing condition, it loses QFZP status from the start of that period and for the following four tax periods. The Minister can prescribe other circumstances or dates (Article 18(3)). The effect reaches the whole business, not just the disputed invoice. A single mispriced invoice can put status at risk. Assess pricing and free zone eligibility together during the year.
Charging an arm’s length price cannot turn non-qualifying income into Qualifying Income. A qualifying activity still needs a defensible price, based on work the free zone company performed.
Which dealings are caught?
The parties’ relationship determines whether transfer pricing applies. Their location alone does not. Article 35 of Federal Decree-Law No. 47 of 2022 defines Related Parties by family links (to the fourth degree), 50% or greater ownership, control, and certain other links such as permanent establishments, partnerships, trusts and foundations. Under Article 36 of the Corporate Tax Law, Connected Persons include any natural person who owns an interest in, or controls, the company; its directors and officers; and their Related Parties. A company needs to assess these links even if it has no overseas subsidiary.
| Deal or payment | Why it needs attention | Evidence to retain |
|---|---|---|
| Free zone company charges a mainland group company for services | A domestic related-party deal is still subject to arm’s length terms; the free zone income classification is a separate question | Service scope, staff time, cost pool, pricing method and invoices |
| Free zone company sells to or buys from a foreign affiliate | Cross-border margins can shift profit between tax systems | Contracts, functions and risks, comparables and settlement records |
| Group company lends to the free zone entity, or vice versa | Interest and other terms should reflect the financing actually provided | Loan agreement, credit analysis, tenor, security and rate support |
| Owner or director receives remuneration or supplies property | Payments to an owner, director or officer (a Connected Person) are deductible only to the extent they match Market Value and are incurred wholly and exclusively for the business. This Market Value limit does not apply to companies listed on a Recognised Stock Exchange or businesses regulated by a UAE competent authority (Article 36(6)). Those companies still have to meet the general deduction rules and Article 34 for Related Party dealings. | Role or lease, approval, comparable remuneration or rent and payment records |
| IP or shared staff move between group entities | Legal ownership alone does not show who created value or bore costs | Rights, personnel activities, allocation keys and benefit received |
Related party transfer pricing applies to controlled transactions with other free zone entities as well as mainland and foreign group members. There is no general exemption just because both counterparties are in the UAE, or because a group expects little overall UAE tax. Not every shareholder payment is automatically deductible either: the nature of the payment and the connected-person rules need separate analysis.
“transactions and arrangements between Related Parties or Connected Persons are priced as if the transactions or arrangements had occurred between independent parties under similar circumstances.” - FTA Transfer Pricing Guide
FTA guidance can lag later legislation. Where the two differ, the legislation applies.
What a QFZP must document
Keep three obligations distinct: support the price, make any required return disclosure and maintain formal files where the size tests apply.
Records for the transaction, even below the file thresholds
For each significant arrangement, keep its terms, the parties’ relationship, what was supplied, the pricing calculation and evidence of delivery or use, and reconcile the amounts to the ledger and Corporate Tax return. The law requires records supporting the return to be kept for seven years, and the FTA can ask for support for arm’s length pricing at any size. An invoice description alone does not explain the arm’s length outcome.
For a management fee, for instance, identify the people who delivered services, the costs included in the pool, the allocation key and why the recipient benefits. For a loan, record the borrower’s circumstances and the contractual terms used to compare rates; centralised treasury arrangements call for particular care. These records also help distinguish qualifying from non-qualifying revenue and substantiate adequate substance in the free zone.
Disclosure with the Corporate Tax return
Article 55 lets the FTA require a disclosure in the form it prescribes. The FTA’s Tax Returns Guide sets the current tests: a Related Party schedule where Related Party transactions exceed AED 40 million in total (categories over AED 4 million are listed), and a Connected Persons schedule where payments or benefits to any one Connected Person, together with that person’s Related Parties, exceed AED 500,000. Under FTA Public Clarification CTP011 (July 2026), any Related Party transaction with a downward transfer pricing adjustment in the return must be disclosed whatever its value, and no prior FTA approval is needed for the adjustment. Filing a disclosure does not replace the pricing analysis. Nor is a master file attached to every return.
Capture the counterparty, type and value of each deal during the year, then reconcile the return with the records. Calling a payment to the owner a salary does not settle how it is treated; the Connected Person rules still apply. Accounting consolidation does not remove a recharge between separate entities, and a QFZP cannot join a Tax Group.
When a master file and local file are required
Ministerial Decision No. 97 of 2023 sets out the tests for maintaining the files. The obligation applies where a Taxable Person is a constituent company of a multinational enterprise group with consolidated group revenue of at least AED 3.15 billion in the relevant tax period, or where the Taxable Person’s revenue is at least AED 200 million in that tax period. The size of an individual related-party transaction is not the test for these files.
The FTA Transfer Pricing Guide says a company in a UAE-headquartered group with no business establishments outside the UAE does not need a master file, but should keep a local file if a threshold is met. That relief is in FTA guidance, not in Ministerial Decision No. 97 of 2023, which refers to both files.
| Record | What it addresses | When it is needed |
|---|---|---|
| Transaction support | The pricing, commercial purpose and actual performance of controlled dealings | Where there are relevant Related Party or Connected Person arrangements, regardless of file threshold |
| Return disclosure | Reportable Related Party and Connected Person dealings in the prescribed return | According to the FTA return requirements and applicable reporting tests |
| Master file | The multinational group’s structure, businesses, intangibles, intra-group financing and financial and tax positions | Where the file tests apply, but only FTA guidance relieves a UAE-headquartered group with no foreign establishments |
| Local file | The UAE entity’s specified controlled transactions, functional analysis, method and comparables | Where either Ministerial Decision No. 97 file threshold applies, subject to that decision’s scope rules |
Maintain the master file and local file for submission if the FTA requests them; they are not routinely filed with the return. Ministerial Decision No. 97 also defines which arrangements belong in the UAE local file. Where a local file is required, it covers dealings with Related Parties and Connected Persons that are non-residents, exempt persons, Small Business Relief claimants or UAE residents taxed at a different rate from the company, subject to the exclusions in Ministerial Decision No. 97. A deal between a QFZP and a mainland company taxed at 9% will usually be in the file; a domestic deal between companies taxed at the same rate is usually left out. Apply the scope rules to each entity and counterparty.
How to support an arm’s length outcome in UAE transfer pricing
Map who performs the work, uses assets and controls risks. Compare that map with contracts, staff records, accounts and cash flows. If personnel elsewhere negotiate contracts and control inventory risk, a free zone entity described as a regional principal needs a pricing model that reflects their work.
Article 34 lists five methods (comparable uncontrolled price, resale price, cost plus, transactional net margin and transactional profit split), used alone or in combination. Another method may be used only if none of the five can reasonably be applied and the result is still arm’s length, and the choice must be the most reliable method. Select the method that fits the transaction and available comparable information. An internal sale to an independent customer may give a more direct comparison than a broad database margin; a shared-services charge may need a carefully defined cost pool and a defensible allocation key. Explain why the selected method fits and why any rejected comparable is unsuitable.
For benchmarking, record search criteria, relevant economic features, adjustments and the calculation of the tested result. If local comparisons are limited, explain differences in markets, functions and terms when using foreign data. Update the analysis after a change in the business model, risk allocation or contract terms. Reconcile the tested figures to the accounts.
A year-end control
- List Related Parties and Connected Persons, including common-control entities and relevant individuals.
- Reconcile invoices, journals, loans and year-end balances by counterparty; identify arrangements without cash invoices.
- Classify each revenue stream under the free zone rules independently of its transfer price.
- Prepare or update pricing support and, if the size tests apply, the master file and local file.
- Compare the disclosure schedules with the return, audited accounts and underlying contracts before filing.
Mistakes that put QFZP status at risk
Treating 0% as automatic. The rate depends on QFZP status and the character of the income. Benchmarking cannot cure a mainland sale that produces non-qualifying income, an excluded activity or a failure of the de minimis condition.
Using group labels in place of evidence. For a management charge, show the services delivered and the recipient’s benefit. For a royalty, document the rights used and which entities develop and exploit the asset. Holding a contract in the free zone does not explain profits generated by activities elsewhere.
Applying an overseas policy unchanged. A global cost-plus mark-up or financing rate may not match the UAE entity’s functions, terms or counterparties. Check how the global policy maps to the local books and the qualifying-income analysis.
Confusing formal file thresholds with a safe harbour. The AED 200 million and AED 3.15 billion tests concern master and local files. They do not switch off Article 34 for a smaller free zone business. Nor does the absence of a master file mean the entity has no records to produce if the FTA asks about an arrangement.
Leaving the analysis until the return is due. Retrospective allocations are harder to reconcile with the services delivered and the risks actually borne. Set the basis before charges start, then document any year-end true-up and its effect on income classification.
When to obtain senior advice
Seek specialist input before implementing a restructuring, centralising IP, placing a treasury function in a free zone or charging material fees between a QFZP and mainland or overseas companies. Advice is also warranted where an owner-manager’s remuneration overlaps with company profits, where a foreign tax authority may take a different view of the same transaction, or where an FTA enquiry could affect both pricing and QFZP eligibility.
Where a transaction spans tax systems or puts free zone status at issue, senior advice can help match the pricing evidence to the actual operating model.
Document arrangements as they are made, test prices against independent-party terms and classify free zone income separately. This is general information, not advice on any particular facts.
FAQ
Who needs to do transfer pricing?
A UAE business that has transactions with Related Parties must apply the arm’s length standard. This includes a free zone company seeking QFZP treatment. Under Article 36, a payment or benefit to a Connected Person is deductible only to the extent it matches Market Value and is incurred wholly and exclusively for the business. Companies listed on a recognised stock exchange and businesses regulated by a UAE competent authority are outside this limit. The master file and local file are required only where the relevant size tests apply, but smaller entities still need support for their prices.
Are UAE free zone companies tax free?
No. Corporate Tax is a federal UAE tax. A Qualifying Free Zone Person can pay 0% on Qualifying Income if it meets the QFZP conditions; other taxable income is taxed at 9%, without the AED 375,000 0% band. Other federal taxes can also apply, such as VAT at 5% on taxable supplies. Related Party transactions still need arm’s length support. Under Article 36, a payment or benefit to a Connected Person is deductible only to the extent it matches Market Value and is incurred wholly and exclusively for the business. Companies listed on a recognised stock exchange and businesses regulated by a UAE competent authority are outside this limit.