Navigating the Scope of UAE Transfer Pricing Local Files

Introduction

With the UAE’s transition into a comprehensive Corporate Tax regime, Transfer Pricing (TP) has shifted from a best-practice recommendation to a rigorous statutory obligation. Central to this is the Local File, a document that serves as the primary evidence of "Arm’s Length" pricing for specific intra-group dealings.

However, the UAE framework is not a "one-size-fits-all" model. Unlike some jurisdictions that require documentation for all intercompany activities, the UAE’s Ministerial Decision No. 97 of 2023 adopts a risk-based scope. It specifically targets transactions where the potential for profit shifting is highest. For Tax Professionals and CFOs, the challenge lies not just in the preparation of the file, but in the precise identification of which transactions fall within the "Taxable Net" and which remain exempt.

Transactions In-Scope

The Federal Tax Authority (FTA) has prioritized transparency in scenarios where a tax differential exists between two parties. We categorize the mandatory inclusions into four high-risk clusters:

1. Cross-Border Dynamics (Non-Resident Related Parties)

“Any transaction with a Non-Resident Related Party must be included.”

This is the most critical area of focus. Since these transactions involve shifting value outside the UAE tax jurisdiction, they are subject to the highest level of scrutiny during audits.

2. Domestic Arbitrage (Exempt Persons)

“Transactions with Exempt Persons (e.g., Government entities or certain NGOs).”

Even though the transaction is domestic, the difference in taxability creates an incentive to move profits toward the exempt entity. The Local File must hence robustly justify the pricing to negate any "tax benefit" assumptions.

3. Small Business Relief

“Transactions with Resident Persons Electing under Article 21.”

This creates a unique compliance paradox. While the counterparty enjoys simplified tax reporting, the larger entity transacting with them must maintain full TP documentation to ensure the "relief" is not being leveraged for artificial profit shifting.

4. Rate Mismatches (Free Zone vs. Mainland)

“Transactions with Resident Persons subject to a Different Tax Rates.”

This is arguably the most common complexity in the UAE market. The FTA is particularly sensitive to the "Free Zone/Mainland" interface and ensuring these transactions are at arm’s length is vital to protecting the 0% status of the Free Zone entity.

Exempted Transactions 

Ministerial Decision No. 97 also provides significant relief by excluding many domestic, same-rate transactions. However, these exclusions are not unconditional.

The following transactions are not required to be included in the Local File:

• Transactions with Resident Persons, unless they fall within the specific inclusion categories listed above.
• Transactions with natural persons, provided the parties are acting independently.
• Transactions with a juridical person that is a partner in an Unincorporated Partnership, provided the parties act independently.
• Transactions with a Permanent Establishment in the UAE that is subject to the same Corporate Tax rate as the taxable person.

The "Independent" caveat is the "fine print" that businesses often overlook. To qualify for an exclusion, you must prove the transaction occurred in the ordinary course of business and that the parties are not exclusively transacting with each other. If a business relies solely on one related party for its revenue, the "Independent" argument fails, and the transaction may move back into the "In-Scope" category.

Conclusion

The UAE Local File is more than a compliance burden; it is a strategic defense document. By clearly defining the scope, the UAE authorities have signalled that they are looking for substance over form. For businesses, the first step in the 2026 TP cycle should be a comprehensive scoping exercise to map out counterparties and tax rates, ensuring that documentation efforts are focused where the risk actually resides.