Transfer pricing for SMEs: what you actually need below the thresholds

What transfer pricing is, and why SMEs are caught

Transfer pricing is the price charged between related parties for goods, services, financing, or the use of intangible assets. The arm's-length principle, set out in Federal Decree-Law No. 47 of 2022, requires those prices to match what independent parties would agree under comparable circumstances.

You might think this only catches large corporates, but the law draws a wide net. A "related party" includes entities where one holds 50% or more of the other, or where common ownership or control exists. A "connected person" covers directors, officers, relatives, and their businesses. If your spouse owns a company that provides consulting services to your trading LLC, that is a connected-person transaction and the arm's-length standard applies in full.

SMEs get caught because they rarely price these transactions deliberately. A management charge is set at a round number. An intercompany loan carries no interest. Rent is charged at whatever feels convenient. Each of those is a transfer pricing risk, regardless of group size.

What you actually need below the thresholds

Below the master file and local file thresholds, your obligations are narrower but still real. Three things apply to every taxable entity with related-party or connected-person transactions:

• Arm's-length pricing on every transaction: you need a defensible basis for the price, even if it is a simple comparable or cost-plus calculation.
• The transfer pricing disclosure form: this is filed alongside your corporate tax return and requires you to list related-party transactions, their nature, and their values.
• Intercompany agreements: written contracts that document what was supplied, the price, and the commercial rationale.

You do not need a benchmarking study with 30 comparable companies. You do not need a 100-page local file. But you do need enough documentation to show the FTA that prices were set with the arm's-length principle in mind, not plucked from thin air. A one-page memo explaining your pricing method, supported by a simple agreement, is often sufficient for straightforward transactions. The point is proportionality: the effort should match the risk.

When the full master and local file kick in

Ministerial Decision No. 97 of 2023 sets two thresholds. A full master file and local file are required where the entity's revenue is at least AED 200 million, or where the entity belongs to a multinational enterprise group with consolidated revenue of at least AED 3.15 billion. These documents follow OECD guidelines and include detailed functional analyses, financial data, and benchmarking studies.

If you are reading this article, you probably sit well below those numbers. That is fine. The thresholds exist precisely to keep the compliance burden proportionate. But do not confuse "no master file required" with "no transfer pricing obligations." The disclosure form and arm's-length pricing apply from the first dirham of related-party activity.

One scenario to watch: fast-growing groups. If your revenue is approaching AED 200 million, start preparing now. Building a local file from scratch under deadline pressure is expensive and stressful. Groups working with Cosmos can flag approaching thresholds early through their accounting data, giving them time to engage a transfer pricing adviser before the obligation bites.

Intercompany agreements: the document most SMEs are missing

This is the gap we see most often. Two related companies transact with each other for years, there is no written agreement, and nobody thinks twice about it until a tax return needs filing or an FTA query arrives.

An intercompany agreement does not need to be a 40-page contract drafted by a magic-circle law firm. It needs to cover the basics: who is providing what, the price or pricing mechanism, payment terms, the effective date, and what happens if the arrangement changes. It should reflect economic reality, meaning the services described actually happen, the invoices match the agreement, and the payments flow through the bank.

Generic templates downloaded from the internet are risky. They often contain boilerplate clauses that do not match your actual arrangement, creating inconsistencies the FTA can question. A bespoke agreement drafted with professional input does not cost much, but it removes a significant vulnerability. If you have a management services charge, a shared-cost arrangement, or an intercompany loan, each one needs its own agreement.

The mistakes that create exposure

The pattern is predictable. A group sets up two or three entities, transactions happen informally, and the founder assumes everything is fine because the group is small. Here are the specific errors that tend to trigger scrutiny:

• Interest-free intercompany loans: the FTA expects a market-rate interest charge. Charging zero is not arm's length.
• Management fees with no substance: a mainland entity charges a free-zone entity a "management fee" but cannot explain what services were provided, who performed them, or how the fee was calculated.
• Inconsistent filings: the VAT return shows intercompany supplies at one value, the corporate tax return shows another, and the transfer pricing disclosure form shows a third. Algorithmic risk-scoring tools flag these mismatches quickly.
• No documentation at all: the founder assumes transfer pricing for small businesses means no documentation. It means less documentation, not none.

Each of these is avoidable with modest effort. The cost of fixing them after an FTA query is always higher than getting them right from the start.

Free-zone and QFZP entities are not exempt

This misconception is widespread enough to deserve its own section. Qualifying Free Zone Person status grants a 0% corporate tax rate on qualifying income, but that status comes with conditions. One of those conditions is full compliance with transfer pricing rules, including the arm's-length principle and the disclosure form.

If a QFZP entity fails to meet its transfer pricing obligations, it risks losing the 0% rate entirely, not just on the mispriced transaction but on all qualifying income for that tax period. That is a severe consequence for what might seem like a minor administrative oversight.

Free-zone entities transacting with mainland related parties need particular care. The tax rate differential between 0% and 9% creates an obvious incentive to shift profits into the free zone, and the FTA knows it. Pricing those transactions at arm's length, documenting the rationale, and holding proper intercompany agreements are not optional extras. They are conditions of keeping the tax benefit.

Getting it proportionate

Transfer pricing compliance for SMEs should not consume weeks of effort or tens of thousands of dirhams. The goal is a defensible position, not a perfect one. Here is a practical framework:

• List every related-party and connected-person transaction. Include services, goods, financing, and any shared costs.
• For each transaction, identify a simple pricing method. Cost-plus works for services. Comparable uncontrolled price works where you have third-party benchmarks.
• Draft or update intercompany agreements for each material transaction.
• Complete the transfer pricing disclosure form accurately and file it with your corporate tax return.
• Keep a short file note explaining your pricing rationale. One to two pages per transaction type is usually enough.

Cosmos coordinates this process through its licensed local partners, connecting your bookkeeping data with the compliance steps so nothing falls through the cracks. The platform does not replace a qualified transfer pricing adviser for complex structures, but for straightforward SME groups, it keeps the basics organised and on time.

Frequently asked questions

Do small businesses need transfer pricing documentation?

Yes. Every UAE taxable entity with related-party or connected-person transactions must price them at arm's length and file the transfer pricing disclosure form. You do not need a master file or local file below the AED 200 million revenue threshold, but you still need intercompany agreements and a defensible pricing rationale.

What are the UAE transfer pricing thresholds?

A full master file and local file are required only where the entity's revenue reaches AED 200 million, or where the entity belongs to an MNE group with consolidated revenue of at least AED 3.15 billion, per Ministerial Decision No. 97 of 2023. Below those figures, the disclosure form and arm's-length pricing still apply.

What is an intercompany agreement?

It is a written contract between related entities that documents the nature of the transaction, the pricing mechanism, payment terms, and the commercial rationale. It should reflect what actually happens in practice and be supported by matching invoices and bank transfers.

Do free-zone or QFZP companies have transfer pricing obligations?

Absolutely. Transfer pricing compliance is a condition of maintaining QFZP 0% status. Failure to meet these obligations can result in losing the preferential rate for the entire tax period. Free-zone entities must apply the arm's-length principle and file the disclosure form like any other taxable person.

Getting transfer pricing right as a smaller group is not about producing volumes of paperwork. It is about pricing transactions deliberately, documenting them simply, and filing the disclosure form on time. If you have related-party transactions and no intercompany agreements in place, that is the single most important thing to fix this quarter. Cosmos can help you organise the process through its network of licensed advisers, but the first step is yours: take stock of your related-party dealings and make sure each one has a defensible price and a written agreement behind it.

This is general information, not tax or legal advice. Confirm your position with a qualified adviser before acting.