Since the introduction of the UAE Corporate Tax in 2023, transfer pricing has quickly become one of the most important areas of compliance for businesses and one of the most misunderstood.
One issue I see regularly is how companies deal with shareholder-director remuneration. Many companies have already faced qualified audit opinions where director salaries were not supported by a proper transfer pricing report.
So, what does “arm’s length” really mean in this context, and how should you prepare?
Why Director Salaries Matter for Transfer Pricing
Under the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022) and Cabinet Decision No. 97 of 2023, related party transactions — including salaries paid to shareholder-directors must follow the arm’s length principle.
That means:
- Salaries should be set at the same level an independent party would pay for the same role in the same market.
- Excessive pay, or salaries that absorb all company profits, can be reclassified by the FTA as disguised dividends (non-deductible for tax).
- Businesses must be able to defend director pay with external benchmarking and documentation.
What Auditors and the FTA Expect
From my experience advising UAE free zone companies, auditors want to see:
- Functional Analysis (FAR): What each director actually does functions, assets used, risks assumed.
- External Benchmarking: Comparison of pay against UAE market salaries and regional salaries.
- Past Salaries: To show pay has been consistent and not artificially adjusted.
- Financial Testing: Proof that, after paying directors, the company retains a reasonable profit margin for the sector.
Without this evidence, you risk an audit qualification or, worse, an adjustment from the FTA.
Transfer pricing is no longer just a concern for large multinationals. Under the UAE Corporate Tax regime, demonstrating compliance with the Arm’s Length Principle applies to all companies. Every business must be able to show that director salaries and related party transactions are set at fair market value.
A properly prepared Transfer Pricing Report is a modest investment compared to the potential risks of audit challenges, penalties, or disallowed deductions.
If you’d like support preparing compliant documentation or if your audit has already raised concerns please get in touch and we can arrange an initial consultation to discuss your requirements and the best way forward.