The Federal Tax Authority (FTA) has announced that businesses must complete Corporate Tax registration within 90 days from the Date of Incorporation / MOA.
The UAE Corporate Tax Law, which came into effect in June 2023, introduced transfer pricing rules to make sure that transactions between related parties are conducted at fair market value. These rules are not only for mainland companies but also apply to free zone companies, even if they enjoy the 0% corporate tax benefit as a Qualifying Free Zone Person (QFZP). The main aim of transfer pricing is to prevent businesses from shifting profits artificially to reduce tax and to ensure that each transaction reflects what independent parties would have agreed upon.
The Federal Tax Authority (FTA) oversees and enforces these rules, requiring companies to maintain proper documentation and justify the prices of related-party transactions. This helps the UAE stay aligned with OECD international standards, improves transparency, and protects the integrity of the tax system.
For free zone companies, this means they must carefully follow TP compliance requirements, such as maintaining proper records, disclosing high-value transactions, and preparing supporting files if thresholds are met. Even small mistakes can result in penalties or loss of tax benefits.
Overview of UAE Free Zone Transfer Pricing Rules
In the UAE, free zone companies must follow special rules under the Corporate Tax Law (Articles 34 and 55) when they do business with related parties, such as their parent company, sister company, or subsidiaries.
The main rule is the Arm’s Length Principle. This means that any deal with a related party should look the same as if it was done with an independent company in the market. For example, if you sell a product to your sister company, the price should be the same as what you would charge another customer.
Free zone companies may also need to prepare certain transfer pricing documents.
These documents include:
- Transfer Pricing Disclosure Form – submitted along with the tax return.
- Master File – contains overall information about the entire group of companies.
- Local File – explains the details of related-party transactions happening in the UAE, and is mandatory for transactions withTaxable Persons subject to a different corporate tax rate, irrespective of the standard revenue thresholds.
- Country-by-Country Report (CbCR ) – only required for very large multinational groups that meet global revenue limits.
Compliance Challenges for Free Zone Companies
Free zone companies in the UAE enjoy major benefits like the 0% corporate tax rate, but keeping that benefit depends on meeting strict rules.
Some of the most common challenges include:
- Incorrect economic substance documentation – Companies must show that they have enough staff, office space, assets, and business activities in the free zone. If this is not properly documented, the FTA may deny tax benefits.
- Improper pricing of related-party transactions – Transfer pricing rules require transactions with related companies to be at fair market value. Many businesses fail to benchmark these correctly, even when trading with other free zone entities.
- Incomplete or missing transfer pricing files – Without proper documentation like Local Files, Master Files, or TP disclosure forms, companies will cease to meet a mandatory QFZP condition, resulting in audits, penalties, and the automatic loss of their 0% tax eligibility for five years.
- Misunderstanding " Qualifying Income " – Not all income of a free zone company is tax-free. If income comes from non-qualifying activities (such as trading with mainland UAE businesses), it may be taxed at the standard 9% rate.
If these standards are not met, free zone companies risk:
- Losing the 0% corporate tax status
- Being taxed at the 9% standard rate on all income
- Facing financial penalties, FTA audits, and reputational damage
How Professional Guidance Can Help Free Zone Companies?
- Free zone companies in the UAE must follow strict tax and transfer pricing rules. Getting help from tax professionals makes
- compliance easier and safer. Here’s how experts can support:
Maintain QFZP Benefits
- Ensure the company meets all conditions to qualify as a Qualifying Free Zone Person (QFZP).
- Check that business activities, income sources, and substance requirements are all compliant.
Transfer Pricing Expertise
- Apply the arm’s length principle to related-party transactions.
- Prepare proper transfer pricing documentation to avoid disputes.
Audit Preparedness
- Keep disclosure forms, Master File, and Local File ready for the Federal Tax Authority (FTA).
- Ensure all documents are accurate and up to date for smooth audits.
Cost Efficiency & Risk Reduction
- Prevent penalties, misclassification, and unnecessary tax payments.
- Save costs by correcting issues before they become problems.
Strategic Tax Planning
- Get advice on how to structure operations in a tax-efficient way.
- Balance compliance with long-term business growth.
Conclusion
In the UAE, transfer pricing is now a major part of corporate tax rules, and it also applies to free zone companies. Even if your business enjoys the 0% tax rate as a Qualifying Free Zone Person (QFZP), you still need to follow the UAE free zone transfer pricing rules and keep the right documents in place.
If these rules are not followed correctly, free zone companies may face audits, penalties, or even lose their QFZP benefits. That’s why it’s important to check that all related-party transactions are done at fair market value and properly reported.
At Reyson Badger, we help free zone businesses stay compliant, avoid risks, and keep their tax benefits safe. With expert guidance, you can focus on growing your company while we handle the complex rules and documentation.
