With Corporate Tax Reshaping the Landscape, Transfer Pricing is Now a Governance Tool—Free Zone 0% Regimes Face Sharp FTA Scrutiny, Demanding Arm’s Length Pricing, Robust Documentation, and Real Substance.

6 Practical Guidelines-

1. Unified TP Rules Apply Everywhere
2.  FTA Scrutiny on Profit Shifting 
3. Arm’s Length Benchmarking Essential
4.  Substance Needed, Avoid PE Risks
5.  Strict Documentation Thresholds Apply 
6. Strategic Planning Safeguards Benefits

1. Legal & Regulatory Framework

Mainland Entities:

• Taxable at the standard 9% CT rate on taxable income exceeding AED 375,000.
•  Subject to full TP compliance including master file, local file, and disclosure form (depending on revenue and group thresholds).

Free Zone Entities:

• Can access a 0% CT regime on Qualifying Income if they meet substance and activity conditions. 
• However, any non-qualifying income (including some related-party transactions) is taxed at 9%.
•  Free Zone companies are still subject to TP regulations; exemption from corporate tax does not mean exemption from TP compliance.

2. Transfer Pricing Risks: Free Zone vs. Mainland

(A) Profit Shifting Concerns

• If a Free Zone entity benefits from 0% CT while its related Mainland entity is taxed at 9%, there is a strong incentive to shift profits to the Free Zone.
•  Common examples is under-charging for goods/services supplied by the Free Zone entity, over-allocating costs to the Mainland entity. 
• The FTA will closely scrutinize such arrangements.

(B) Arm’s Length Pricing Challenges

• Service arrangements (management fees, IT charges, shared services) are particularly sensitive. 
• Free Zone entities must show that charges are commensurate with value creation and not structured solely for tax benefits.

(C)  Substance & Permanent Establishment (PE) Risks

• A Free Zone entity with limited real operations may still be viewed as a “conduit” or create a PE in the Mainland. 
• This can expose Free Zone profits to 9% CT and trigger additional compliance.

3. Documentation & Compliance Obligations

1. TP Disclosure Form – submitted with the CT return if consolidated revenues exceed AED 200 million.
2.  Local File – required where revenues exceed AED 50 million or related-party transactions involve non-resident or exempt parties. 
3. Master File – if part of a large multinational group.

FTA’s Focus:

• Related-party pricing between Mainland and Free Zone entities.
•  Correct segmentation of “Qualifying” vs. “Non-qualifying” income for Free Zone entities.
•  Benchmarking of intercompany loans, royalties, and services.

4. Practical Examples

• A Mainland trading company sells products to its Free Zone affiliate at below-market prices. The Free Zone entity exports at a higher margin. The FTA may adjust the intercompany pricing to ensure the Mainland entity retains an arm’s length margin.
•  A Free Zone head office charges AED 2 million management fees to its Mainland subsidiary. If benchmarking shows comparable charges should be only AED 1.2 million, the excess AED 0.8 million may be re-characterized, reducing deductible expense for the Mainland entity. 
• A Free Zone distribution entity with minimal staff and no warehousing invoices high service fees to a Mainland affiliate. The lack of substance may trigger a challenge, with the FTA reallocating profits to the Mainland.

5. Strategic Considerations

For Free Zone Entities:

• Maintain strong economic substance in the Free Zone. 
• Carefully segregate qualifying vs. non-qualifying income. 
• Prepare robust benchmarking studies for all related-party dealings with Mainland affiliates.

For Mainland Entities:

• Ensure that intercompany expenses (royalties, management fees, financing costs) are arm’s length and adequately supported.
•  Be prepared for the FTA to challenge profit allocations where Mainland profits appear suppressed.

Conclusion