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Arm's length principle

Applies
FY2024 onwards
Reviewed
Rule
UAE-CT-ALP-2024.1
By

What does the UAE arm's length principle require?

Related Party transactions must give the result unrelated parties would reach in similar circumstances. Outside the arm's length range, the FTA adjusts.

Per Federal Decree-Law No. 47 of 2022, Article 34, Arm's Length Principle

In determining Taxable Income, transactions and arrangements between Related Parties must meet the arm's length standard: their results must be consistent with the results that would have been realised if Persons who were not Related Parties had engaged in a similar transaction or arrangement under similar circumstances, together with any conditions the Authority prescribes. Applying a transfer pricing method may produce an arm's length range of results, and where the result does not fall within that range the Authority shall adjust the Taxable Income to the arm's length result that best reflects the facts and circumstances, relying on information that can or will be made available to the Taxable Person.

Head (e) of Article 20(2). The standard the whole of Chapter Ten enforces. The Taxable Person self-assesses it in the Tax Return, upward or downward, without prior approval; the Authority may adjust on examination. This page computes where a result sits against the range a reader has established, and the least movement that reaches it.

The standard, the range, and who adjusts

34(1)–(2) — the standard

  • Transactions and arrangements between Related Parties must meet the arm's length standard, together with any conditions prescribed in a decision issued by the Authority
  • They meet it where their results are consistent with the results that would have been realised if Persons who were not Related Parties had engaged in a similar transaction under similar circumstances

34(7) — the range

Applying the selected method or combination may result in an arm's length range of financial results or indicators acceptable for establishing the arm's length result — subject to any conditions the Authority specifies. A range comes from comparables, so the bounds are the reader's to establish and nothing here derives one.

Who adjusts — the Taxable Person first, the Authority on examination

  • Article 34(1) makes the arm's length standard part of determining Taxable Income, so a Taxable Person whose recorded result is outside the range adjusts in its own Tax Return — upward or downward, without the Authority's prior approval (CTP011)
  • Where the Authority examines the position and the result is outside the range, Article 34(8) has it adjust to the arm's length result that best reflects the facts, relying under Article 34(9) on information available to the Taxable Person

Which point in the range — FTA Transfer Pricing Guide, 5.3.4

  • The interquartile range is accepted as the arm's length range where there are enough observations
  • Any point within the range is acceptable, but the FTA weighs the functional profile: nearer the lower quartile for a limited-risk entity, nearer the upper for high-value functions
  • So the movement to the nearer bound this page reports is the least that reaches the range, not necessarily the point the Authority would choose

Downward adjustments — CTP011 (July 2026)

  • Disclosed in the Tax Return whatever their value
  • Supported by the rationale, an arm's length analysis with a benchmarking study, a reconciliation between the financial statements and the return, and the Related Party's symmetrical corresponding adjustment

A result inside the range is left alone

Clause 8 bites only where the result does NOT fall within the range. A compliant result is not moved toward a median, and a figure that did so would be one the article does not authorise.

Order of testing

  1. 1

    Inputs requiring your determination

    Any input a person must decide and has not decided stops the computation. The figures are asked for only once the standard applies — asking an unrelated-party transaction for a benchmarking range would ask for work the article does not require.

  2. 2

    A transaction between Related Parties

    The standard governs transactions between Related Parties. Where the counterparty is not one, Article 34 does not apply and the Connected Person question under Article 36 is separate.

  3. 3

    Position within the arm's length range

    Where the result falls within the range, Article 34(8) is not engaged and nothing is adjusted.

  4. 4

    Position outside the arm's length range

    Where it does not, the movement to the nearer bound is computed and reported as the arithmetic of the gap — not as the arm's length result, which the Authority determines.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

A management fee within the range

An intra-group management charge of AED 4,200,000, against a benchmarked range of AED 3,800,000 to AED 4,600,000.

Computed

The result of AED 4,200,000 falls within the arm's length range of AED 3,800,000 to AED 4,600,000 as computed, so Article 34(8) is not engaged: it adjusts only where the result does not fall within the range, and a result inside it is not moved toward a midpoint. Whether the range itself is the arm's length range is your determination. Article 34(1) requires Taxable Income to be determined on the arm's length standard, so the Taxable Person makes any transfer pricing adjustment itself in the Tax Return, upward or downward, without prior approval (public clarification CTP011). On examination, Article 34(8) lets the Authority adjust to the arm's length result that best reflects the facts and circumstances, relying under Article 34(9) on information that can or will be made available to the Taxable Person.

Workings

Result of the transaction as recordedas supplied
AED 4,200,000
Arm's length range — lower boundArticle 34(7) — from your comparables
AED 3,800,000
Arm's length range — upper boundArticle 34(7) — from your comparables
AED 4,600,000
Adjustment indicatednil — the result is within the range
AED 0

Decided by the position within the arm's length range

A charge above the range

The same arrangement charged at AED 5,500,000 against the same range.

Computed

The result of AED 5,500,000 falls above the arm's length range of AED 3,800,000 to AED 4,600,000 as computed. Bringing it to the nearer bound of AED 4,600,000 would be a movement of (AED 900,000), based on the figures you supplied. The movement to the nearer bound is the least that reaches the range; the FTA's Transfer Pricing Guide treats any point in the range as acceptable but weighs the functional profile in judging the appropriate point, so a larger movement may be warranted. If the adjustment reduces Taxable Income — a price received that is too high, or a price paid that is too low — it is a downward adjustment: CTP011 requires it to be disclosed in the return whatever its value, supported by the rationale, a benchmarking study, a reconciliation to the financial statements and the Related Party's symmetrical corresponding adjustment. Article 34(1) requires Taxable Income to be determined on the arm's length standard, so the Taxable Person makes any transfer pricing adjustment itself in the Tax Return, upward or downward, without prior approval (public clarification CTP011). On examination, Article 34(8) lets the Authority adjust to the arm's length result that best reflects the facts and circumstances, relying under Article 34(9) on information that can or will be made available to the Taxable Person.

Workings

Result of the transaction as recordedas supplied
AED 5,500,000
Arm's length range — lower boundArticle 34(7) — from your comparables
AED 3,800,000
Arm's length range — upper boundArticle 34(7) — from your comparables
AED 4,600,000
Nearer bound of the rangethe upper bound
AED 4,600,000
Movement to the nearer boundArticle 34(8) — the gap, not the Authority's adjustment
(AED 900,000)

Decided by the position outside the arm's length range

A charge below the range

A service recharge of AED 900,000 where the comparables support AED 1,500,000 to AED 2,100,000.

Computed

The result of AED 900,000 falls below the arm's length range of AED 1,500,000 to AED 2,100,000 as computed. Bringing it to the nearer bound of AED 1,500,000 would be a movement of AED 600,000, based on the figures you supplied. The movement to the nearer bound is the least that reaches the range; the FTA's Transfer Pricing Guide treats any point in the range as acceptable but weighs the functional profile in judging the appropriate point, so a larger movement may be warranted. If the adjustment reduces Taxable Income — a price received that is too high, or a price paid that is too low — it is a downward adjustment: CTP011 requires it to be disclosed in the return whatever its value, supported by the rationale, a benchmarking study, a reconciliation to the financial statements and the Related Party's symmetrical corresponding adjustment. Article 34(1) requires Taxable Income to be determined on the arm's length standard, so the Taxable Person makes any transfer pricing adjustment itself in the Tax Return, upward or downward, without prior approval (public clarification CTP011). On examination, Article 34(8) lets the Authority adjust to the arm's length result that best reflects the facts and circumstances, relying under Article 34(9) on information that can or will be made available to the Taxable Person.

Workings

Result of the transaction as recordedas supplied
AED 900,000
Arm's length range — lower boundArticle 34(7) — from your comparables
AED 1,500,000
Arm's length range — upper boundArticle 34(7) — from your comparables
AED 2,100,000
Nearer bound of the rangethe lower bound
AED 1,500,000
Movement to the nearer boundArticle 34(8) — the gap, not the Authority's adjustment
AED 600,000

Decided by the position outside the arm's length range

A third-party transaction

The same kind of charge to an unrelated customer, which the arm's length standard does not govern.

Computed

Article 34 does not apply as computed: the arm's length standard governs transactions and arrangements between Related Parties, and you have indicated this is not one. Whether the counterparty is a Connected Person is a separate question, decided by Article 36.

Decided by the a transaction between related parties

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

1 input still need your determination:

  • Is the transaction or arrangement between Related Parties?

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

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Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader