Transfer pricing rules for free zone businesses in the UAE now influence how companies structure their operations, manage related party relationships, and safeguard their tax advantages. Many founders assume that being based in a free zone means the Federal Tax Authority will not scrutinise transaction pricing. The truth is that transfer pricing has become one of the most important compliance areas for companies aiming to maintain the 0% rate on qualifying income.
Our guide explains how the rules work, why they matter for free zone companies, and the steps founders should take to stay compliant and protect their Qualifying Free Zone Person (QZFP) status.
How Transfer Pricing Now Shapes the Way Free Zone Companies Operate
From Tax Free Perception to Structured Corporate Tax Reality
When the UAE introduced federal corporate tax, free zone companies became part of the national tax framework. This means every free zone entity must register, file returns, maintain audited financial statements, and comply with transfer pricing rules. The 0% rate remains available, but only for those who meet the conditions set by Cabinet and Ministerial Decisions. Transfer pricing is one such condition, and the FTA expects free zone entities to justify their pricing choices.
What Transfer Pricing Means for Founders
Transfer pricing governs transactions between related parties. This includes intercompany service fees, goods sold within the group, loans or financing arrangements, cost sharing, and payments to individuals linked to the business. These transactions must follow the arm’s length principle, which means they must be priced the same way they would be between independent parties. If the pricing is unrealistic or undocumented, the FTA has the authority to adjust taxable income and question a company’s compliance.
Why Transfer Pricing Compliance Influences QFZP Status
To qualify as a QFZP, a company must meet specific conditions, including compliance with transfer pricing rules. A free zone business that cannot justify its pricing could be seen as failing to meet the arm’s length requirement. This places its QFZP status at risk. Losing QFZP status means all income is taxable at 9% for the current tax year and the four following years. Founders must therefore treat transfer pricing as a core part of their tax strategy, not an afterthought.
How Corporate Tax Applies to Free Zone Companies
QFZPs Versus Ordinary Taxable Free Zone Entities
A QFZP can enjoy a 0% rate on qualifying income and a 9% rate on non-qualifying income. A non-qualifying free zone entity is treated like any other taxable person and is subject to the standard rate. The difference between the two can be significant for cost control, investor reporting, and long-term planning. Maintaining QFZP status requires ongoing compliance with substance requirements, audited accounts, and transfer pricing rules.
What Qualifies as 0% Income
Qualifying income includes revenue from approved activities carried out in the free zone. Most export-focused or free zone-to-free zone activities fall under qualifying income. Certain activities, such as banking, insurance, or ownership of immovable property, are excluded. If a business earns a small amount of non-qualifying income, it can still maintain QFZP status as long as it stays below the de minimis threshold. Once that threshold is breached, the business loses its qualification.
Free Zone Operations With Mainland Exposure
Many free zone companies maintain a small mainland operation, often through a domestic permanent establishment. When this happens, the profits attributable to the mainland presence are taxed at 9%. The FTA expects clear separation between free zone and mainland activities, both operationally and in the financial statements. This makes transfer pricing essential because the company must justify how profits and costs are allocated between the two.
The Arm’s Length Principle and OECD Alignment in the UAE
How the Arm’s Length Principle Works
The arm’s length principle requires related party transactions to be priced as if the two businesses were independent. For example, if a free zone manufacturer sells goods to its mainland distributor at a highly inflated price, the distributor might record artificially low profit. The FTA can adjust that pricing to reflect a fair market value. This prevents groups from shifting taxable profits out of the mainland and into a 0% free zone.
Methods the UAE Recognises Under OECD Guidance
The UAE follows the OECD Transfer Pricing Guidelines. These guidelines outline recognised methods such as comparable uncontrolled price, cost plus, resale price, and the transactional net margin method. Free zone businesses are expected to select the method that best reflects their functions, assets, and risks. The FTA also expects the chosen methodology to be consistently applied across tax periods.
Why Domestic Related Party Deals Are Closely Monitored
Transactions between free zone and mainland entities are often the highest risk because they involve different tax rates. The FTA reviews these closely to ensure companies are not shifting profits. Even if the entire group operates within the UAE, domestic transactions must still meet the arm’s length standard.
Related Parties, Connected Persons, and Group Structures
Who Is Considered a Related Party
A related party includes parent companies, subsidiaries, sister companies, branches, and any company under common ownership or control. Even entities outside the UAE may fall into this category if they share ownership links.
Who Counts as a Connected Person
Connected persons include shareholders, directors, and specific relatives. Payments to connected persons must be reasonable and supported by evidence. For example, a salary paid to a founder must reflect the work they perform, and rent paid to a relative must match market rates.
Common Structures Seen in UAE Free Zones
Typical structures include free-zone holding companies, regional headquarters, trading companies, and shared service centres that provide operational support across a group. Each structure has its own transfer pricing considerations, and founders should ensure their documentation reflects the economic reality of how decisions and activities are made.
Documentation and Disclosure Requirements for Free Zone Businesses
Related Party Disclosure in the Corporate Tax Return
If related party transactions exceed certain thresholds, companies must disclose them on their corporate tax returns. The FTA requires disclosure when the total value exceeds 40 million in a financial period or when a single transaction exceeds 4 million. Payments to connected persons must also be disclosed once they exceed 500,000.
Master File and Local File Obligations
Large free zone companies must maintain a master file and a local file if they meet the authorities’ thresholds. These documents provide a detailed analysis of group relationships, transaction flows, and pricing decisions. The FTA may request these files at any time, so they must be kept ready.
Expectations for SMEs Below Documentation Thresholds
Smaller businesses are not required to prepare full transfer pricing studies. However, they must still maintain evidence to support their pricing decisions. This includes intercompany agreements, cost breakdowns, and, where relevant, simple benchmarking.
CbCR for Large Multinational Groups
UAE-headquartered multinational groups with global revenue above the threshold must file a country-by-country report. This allows the FTA to compare profit allocation across jurisdictions and review whether transfer pricing aligns with economic reality.
How Transfer Pricing Rules Differ for Free Zone and Mainland Companies
Comparing Tax Treatment
Mainland companies pay 9% tax above the small profit threshold. Free zone companies can pay 0% on qualifying income. This difference creates a strong incentive for the FTA to examine transactions between free zone and mainland entities to ensure profits are not artificially shifted.
Small Business Relief Versus QFZP Treatment
Small business relief is available to mainland and non-qualifying free zone companies with revenue below 3 million. QFZPs cannot claim this relief. Founders must decide which regime best suits their structure and long-term strategy.
Transfers Between Free Zone and Mainland Entities
These transactions attract the most attention because of the different tax rates. A free zone business must ensure that margins, prices, and fees are reasonable and that the documentation supports these decisions.
Examples of Transfer Pricing for UAE Free Zone Businesses
Trading and Distribution Margins
If a free zone importer sells goods to a mainland-related distributor, the distributor’s margin must reflect what independent distributors earn in similar markets. If the distributor’s margin is unusually low, the FTA may interpret this as profit shifting.
Shared Service and HQ Charges
A free zone shared services centre providing HR, finance, or IT support must charge a reasonable cost plus markup. The markup should be supported by benchmarking data and applied consistently.
Payments to Founders and Relatives
Payments to individuals linked to the company must reflect market value. This includes salaries, consultancy fees, and rental payments. These must be supported by evidence of service and fair pricing.
Risks, Penalties, and What Happens If You Get Transfer Pricing Wrong
Administrative Penalties and Audit Exposure
The FTA can impose penalties for late filing, incorrect reporting, missing disclosure forms, and inadequate documentation. As the regime matures, audit activity is expected to increase. Being unprepared can lead to both financial and operational stress.
Losing QFZP Status
Failure to comply with transfer pricing rules may result in a company losing its QFZP status. This results in all income becoming taxable at 9% for the current year and the four that follow. The financial impact can be significant and long-lasting.
Non-Tax Consequences
Poor compliance can affect investor confidence, banking relationships, and the company’s standing with free zone authorities. Strong governance and accurate reporting protect long-term growth plans.
How To Build a Transfer Pricing Compliance Framework in Your Free Zone Business
Identify and Map Related Party Transactions
Begin by identifying all entities and individuals linked to your business. Map every transaction involving them. This exercise builds the foundation for transfer pricing compliance.
Set Pricing Policies and Document Them
Develop clear policies for pricing goods, services, financing, and cost allocations. Ensure intercompany agreements and supporting analysis support all related-party transactions.
Align Transfer Pricing With QFZP and Substance Rules
Free zone businesses must show that the activities that generate profit take place within the free zone. This means having an appropriate office, employees, and decision-making processes located within the zone.
How DUQE Supports Tax Ready Free Zone Operations
DUQE supports founders with a structured setup, access to trusted tax specialists, and clear guidance on maintaining compliance across corporate tax, transfer pricing, and substance requirements.
Where the UAE Transfer Pricing Policy Is Headed Over the Next Few Years
Pillar Two and the 15% Minimum
Large multinational groups may face additional tax obligations under the global minimum tax rules. This changes how free zone incentives work for groups above the threshold and may affect location planning.
Expected Shifts in FTA Practice
Businesses should expect more guidance, more queries from the FTA, and a more sophisticated audit approach. The FTA is continuously building capacity and refining its processes.
What Free Zone Founders Should Monitor
Founders should stay alert to any Cabinet or Ministerial updates, changes to qualifying income rules, and new FTA publications. Regular review of their transfer pricing framework is essential to maintain their QFZP status.
Staying Ahead of UAE Transfer Pricing Rules
Key Takeaways for Free Zone Founders
Transfer pricing is now central to corporate tax compliance. Free zone companies must structure transactions carefully, document their pricing decisions, and understand how these choices affect their QFZP status.
Why Early Action Protects Your Tax Position
Founders who take a proactive approach avoid costly penalties, protect their 0% tax benefit, and build investor-ready governance from day one. Preparation today prevents disruption tomorrow.
Speak to a DUQE Specialist
If you want to protect your free zone tax benefits, ensure compliance, and position your company for stable growth, speak to a DUQE specialist today.
Our team can help you review your structure, assess risk areas, and build a transfer pricing policy that supports long-term success.
FAQs
Do Transfer Pricing Rules Apply If My Free Zone Company Only Trades Within the UAE?
Domestic transactions are still subject to transfer pricing rules if they involve related parties or connected persons. Even free zone to free zone activity must meet the arm’s length standard when parties are related.
How Do I Know If My Free Zone Company Is a Qualifying Free Zone Person?
A company must meet several conditions, including substance requirements, audited financial statements, and compliance with transfer pricing rules. If it breaches any condition, it may lose its QFZP status.
What Documentation Does a Small Free Zone Business Actually Need?
Small businesses below the master file and local file thresholds must still keep basic evidence, such as intercompany agreements and simple benchmarking, to justify their pricing.
How Are Transactions Between My Free Zone Company and My Mainland Company Treated?
These transactions are reviewed closely by the FTA because they involve different tax rates. They must be priced at arm’s length and appropriately disclosed in the corporate tax return.
Can I Pay Myself a Salary From My Free Zone Company Without Creating Transfer Pricing Issues?
You can, but the salary must reflect the actual work performed and align with market expectations. Payments to founders are considered connected person transactions and must be reasonable.
What Happens If I Do Not File the Transfer Pricing Disclosure Form?
Failure to file required disclosure forms can lead to penalties and increased audit risk. The FTA expects full transparency regarding related party transactions.
Do I Need a Full Transfer Pricing Study If My Revenue Is Below 200 Million?
No, but you must still support your pricing decisions with documentation. A simplified approach is acceptable for smaller businesses.
How Does Pillar Two Affect Multinational Free Zone Groups?
Large multinational groups may face a domestic minimum top-up tax if their effective tax rate falls below the global minimum. This changes how free zone incentives apply to them.
Can DUQE Help Me Align My Structure With QFZP and Transfer Pricing Rules?
Yes. DUQE helps founders establish compliant structures, evaluate transaction flows, and maintain the documentation required to maintain QFZP status.
How Often Should My Free Zone Company Review Its Transfer Pricing Policies?
At least once a year, or whenever there are major changes in the business, regular reviews ensure alignment with evolving regulations and protect your tax position.