Transfer Pricing for Small Businesses: Arm's-Length Basics

What transfer pricing is: a Dubai–UK example

Transfer pricing is the price one company charges another company under the same ownership for goods, services, staff, IP or money. Tax authorities care because that price decides which country's tax base the profit lands in. It is not just a multinational problem: a founder who owns a Dubai company and a UK company has a transfer pricing question the first time one invoices the other.

Take a simple group. DubaiCo is a mainland Dubai LLC with 40 developers and support staff. It works only for UKCo, a London company that sells software subscriptions to UK customers. The same founder owns 100% of both. DubaiCo's annual costs (salaries, rent, licences, depreciation) are AED 8,000,000. The question is what DubaiCo should invoice UKCo for its services.

Assume all DubaiCo's costs are deductible and there are no losses or other tax adjustments. The figures use 0% on the first AED 375,000 of taxable income and 9% above it. At cost plus 10%, tax is 9% × (800,000 − 375,000) = AED 38,250. Revenue exceeds AED 3m, so Small Business Relief is unavailable. At-cost pricing gives DubaiCo no return for its staff and operating risks: that needs a commercial explanation, not just common ownership. Cost plus 60% gives UKCo a deduction AED 4m larger than at 10%, subject to UK deduction rules. The table is not a recommended tax-saving strategy. Check whether UKCo qualifies for the SME exemption below; the UAE still tests DubaiCo's price independently.

Related parties and connected persons

UAE transfer pricing rules sit in Articles 34 to 36 and 55 of the Corporate Tax Law, Federal Decree-Law No. 47 of 2022. They cover two groups, and the difference matters for small owner-managed businesses.

Related parties (Article 35) are linked by family, ownership or control. The main tests are:

• Individuals related within the fourth degree of kinship or affiliation, including by adoption or guardianship.
• An individual and a company where the individual, alone or with their related parties, owns 50% or more of the company or controls it.
• Two companies where one owns 50% or more of the other, or the same person owns 50% or more of, or controls, both. DubaiCo and UKCo are related parties on this test.
• A business and its permanent establishment or foreign branch, and partners in the same unincorporated partnership.

Connected persons (Article 36) include an owner of the taxable person, its directors and officers, and their related parties. For an ordinary owner-managed company, salary and benefits must reflect the market value of the service received and be incurred wholly and exclusively for business purposes to be deductible. A market-rate salary for genuine work is different from a family member's private expenses. Article 36 has exceptions, including for certain regulated or listed taxable persons; do not assume its special deduction rule applies identically to every company.

Other countries draw these lines differently, so map each relationship under each country's rules. A US LLC owned from Dubai, for example, has its own related-party reporting on Form 5472; see our guide to Form 5472 for foreign-owned LLCs.

The arm's-length principle and common methods

The arm's-length principle says related parties should price their dealings as independent businesses would in comparable circumstances. It comes from Article 9 of the OECD Model Tax Convention and is explained in the OECD Transfer Pricing Guidelines. The UAE applies it through Article 34 of the Corporate Tax Law. These guidelines provide a framework, not a universal statutory mark-up; domestic legislation determines the obligations. The five commonly recognised methods are:

For a service company like DubaiCo, the usual approach is a mark-up on full costs: salaries, benefits, rent, software, depreciation and an allocation of overheads. Pass-through costs that DubaiCo merely re-bills without adding value, such as a third-party licence bought on UKCo's behalf, are normally recharged at cost. Being clear about the cost base matters as much as the percentage.

The OECD Guidelines also offer a simplified approach for low value-adding intra-group services: qualifying routine support such as bookkeeping, HR administration and IT helpdesk can be charged at cost plus 5% without benchmarking the mark-up. Cost-pool, allocation and benefit evidence are still needed. Core business services and services involving unique valuable intangibles or significant risk do not qualify; DubaiCo's software development is not routine group support. Check acceptance in both countries. The OECD's June–July 2026 Chapter VII consultation reproduces this existing approach; proposed revisions are not adopted rules.

Do the functional analysis before choosing a margin. Who owns the software IP, wins customers, directs development and bears warranty or credit risk? A routine developer following UKCo's instructions is not equivalent to a Dubai team creating valuable IP and controlling product strategy. Demonstrate a benefit to UKCo with deliverables, support tickets or time records: an independent customer would not pay for a service it never received. A shareholder's ownership costs should not simply become a management charge to subsidiaries.

What documentation you need, by size

Documentation duties scale with size, but the pricing rule does not. As of October 2026, the UAE position is:

AED 4m is not a separate trigger. For example, AED 36m of goods transactions plus AED 6m of services totals AED 42m: both categories exceed AED 4m and are disclosed. AED 6m of services alone does not activate the detailed related-party schedule. Use gross amounts, not receipts net of payments, and review loans and asset transfers as well as invoice revenue. Dividends are excluded from these thresholds under the FTA return guide.

A master file describes the group, its value chain and policies; a local file analyses the UAE taxpayer's relevant controlled transactions. The AED 3.15bn test concerns a multinational group's consolidated revenue in the relevant tax period, not the local subsidiary's turnover. Under MD 97/2023, local-file coverage includes non-resident counterparties, with specified exclusions for some domestic dealings. File maintenance is not the same as attaching both files to every return.

The disclosure form is part of the corporate tax return, due 9 months after the end of the tax period. Under the FTA's return guidance, an upward adjustment for a non-arm's-length price is entered in the return, while a downward adjustment is allowed only after a successful application to the FTA. Free zone companies claiming the 0% rate must also confirm that related-party transactions are at arm's length and documented; see free zone qualifying income.

The UK side: the SME exemption

The UK generally exempts qualifying small and medium-sized enterprises, subject to exceptions. Measure staff and financial limits across the whole group, including linked or associated enterprises; do not look only at UKCo's headcount. HMRC's SME definition uses staff ceilings of 50 and 250, alongside turnover or balance-sheet limits of EUR 10m for small enterprises, and EUR 50m turnover or EUR 43m balance sheet for medium enterprises. Check the precise boundary tests in the HMRC guidance. The other party's territory also matters: HMRC's treaty list includes the United Arab Emirates. A UK exemption does not switch off UAE pricing requirements.

Intercompany agreements and invoicing

A missing contract, invoices that do not match the contract, or balances left unpaid for years can undermine a sound pricing policy. Sign an intercompany agreement before work starts, but ensure actual conduct matches its terms: tax authorities look beyond the paper. It should cover:

• The services or goods supplied, described as they actually happen.
• The pricing method and cost base, such as full cost plus 10%, with pass-through costs listed separately.
• Invoicing frequency, currency, payment terms and interest on late payment.
• A year-end true-up clause, so that actual costs replace budgeted costs before the accounts close.
• Ownership of any IP the provider creates, and who bears which risks.
• Term, termination and the governing law.

Invoice monthly or quarterly and reconcile balances at every close; our month-end close checklist covers reconciliation. Record the same underlying transaction in both ledgers, allowing for currency conversion and timing differences. Identify VAT, withholding-tax and any interest consequences separately: an arm's-length fee does not settle those questions. Post a supported year-end true-up before finalising accounts and reflect any required tax adjustment in the return. Retain contracts, cost reconciliations, service evidence, invoices and the pricing analysis together. An audit and assurance review of the accounts is not, by itself, proof that a mark-up is arm's length.

Pillar Two in 60 seconds

Pillar Two is the OECD's global minimum tax: a 15% minimum effective rate, tested country by country. It applies only to multinational groups with consolidated revenue of EUR 750m or more in at least 2 of the 4 preceding years. A small or mid-sized group is not in scope, whatever its structure.

The UAE collects domestic top-up tax through its Domestic Minimum Top-up Tax (DMTT) for financial years starting on or after 1 January 2025, under Federal Decree-Law No. 60 of 2023 and Cabinet Decision No. 142 of 2024. It brings in-scope UAE profits towards a 15% effective rate under the GloBE calculation, with exclusions and safe harbours. It is not a flat 15% charge on every UAE company's accounting profit, nor automatically another 6% on top of the ordinary 9% corporate tax rate.

As of October 2026, the OECD Inclusive Framework's side-by-side package, agreed on 5 January 2026, provides a safe harbour for qualifying US-parented groups from the income inclusion rule (IIR) and undertaxed profits rule (UTPR), for fiscal years starting on or after 1 January 2026, subject to its conditions and election. It is not retroactive relief for 2024–2025. Qualified domestic minimum top-up taxes are preserved, so a UAE subsidiary of a large US group can still owe UAE DMTT. The UAE adopted the OECD's 2026 commentary and administrative guidance in MD 96/2026, issued 22 June 2026, applying to fiscal years from 1 January 2025. That decision does not move the safe harbour's own 2026 start date.

Checklist for small groups

1. 1Map every relationshipList each company, branch and owner, and every flow between them: services, goods, loans, guarantees, IP, staff and salaries to owners or family members.
2. 2Decide who does whatFor each flow, write a short description of the functions, assets and risks on each side. This decides which party is the simpler one to test.
3. 3Choose a method and a mark-upPick the OECD method that fits and support the mark-up with comparables or, for genuinely low-value support services, the 5% simplified approach where both countries accept it.
4. 4Sign intercompany agreementsPut the pricing, cost base, invoicing terms and true-up clause in writing before the work starts, and update the agreement when the business changes.
5. 5Invoice and settle on scheduleRaise invoices that match the agreement, settle balances, and reconcile intercompany accounts at every month end.
6. 6True up before year endReplace budgeted costs with actual costs and post the adjustment before the financial statements are signed off.
7. 7Check the thresholds each yearTest the UAE AED 40m, AED 4m and AED 500,000 disclosure triggers, the AED 200m file threshold and the UK SME limits, and keep a short pricing note on file either way.

If you need help setting a defensible mark-up, drafting intercompany agreements or completing the disclosure form with your return, HOF Partners' VAT, GST and corporate tax team can take you through it.